I have been sent a copy of Dame Lucy Doolittle’s latest letter to Dr Roy Spendlove:

from The Director for co-ordinating cross cutting initiatives and partnerships
Whitehall
SW1

Dear Roy,

I am pleased to report that we seem to have weathered the storm over public spending cuts as well as could be expected. The campaign to say “too far too fast” has been too political for my taste, but I fear privately that it seems to have gained some traction. Ministers have to accept they need to be careful from here, given the tough criticisms they are experiencing from the Opposition. As we move into the second half of this Parliament I woudl expect greater realism about spending totals to prevail. The original figures for 2013-15 always looked too tight to me.

Ministers do not seem to be concerned by the paradox of our situation. Total public spending is up by 7.8% this May compared with a year ago, but there have been cuts as most acknowledge. It just goes to show how expensive it is now to provide good government, and how many demands there are on Ministerial priorities and budgets. It is good that public spending has avoided the worst of the cuts as originally vaunted in the media, as public spending has contributed to cushioning the fall in total output at a difficult time in the world economy. I see that real public spending overall is up, but as you know it does not feel like that from where we are sitting.

I give you this background as Ministers do now need more help from your Miscellaneous Projects Division. They are naturally concerned about the double dip and the Euro crisis in the background dragging down the economy. They therefore would appreciate our help in identifying and pursuing capital projects that could provide some counter cyclical stimulus to help lift the economy. They would prefer private finance, but I have explained that these are difficult times and we may need some pump priming public sector money. I think it would be best if you concentrated first on the desirable projects, leaving open the method of financing. We can sort out those details later, once Ministers have indicated their preferences on the type and scale of projects.

We still have some difficult distribution issues for money between departments as a result of Ministerial priorities. Overseas Aid is relatively well off, and European programmes seem to do quite well. At the other end of the spectrum defence and local government seem to be in a tight squeeze. We need to reflect the bduget priorities, though of course we can suggest some relaxation of the squeeze in areas where there are good shovel ready projects. I suspect Ministers are going to be pragmatic about the spending totals given the need for more activity. It looks as if the Bank will oblige by keeping government borrowing rates very low, so there is an incentive to get on and borrow now whilst we can lock in to such favourable rates.

I do hope you can theme some of these projects as green ones, as this will help us meet Ministerial aspirations and EU targets in this important area.

Mr Cameron’s speech this week on welfare reform was a thoughful and important contribution to the debate about the future direction of welfare policy.

He acknowledges that welfare accounts for almost £1 in every £3 the government spends. He rightly wishes to be generous to those in need through disability or ill fortune. He also wishes to promote work as the best kind of welfare for most people of working age. He identifies many of the perverse incentives in the system.

There are 400,000 more people in work than in 2010 when the government was formed. This is good progress, against a difficult economic backdrop. The private sector has comfortably created many more jobs than the public sector has shed, despite all the dire warnings to the contrary when critics saw the forecasts for job reductions by government. Mr Duncan Smith’s programmes to help people back into work are having some favourable impacts. The numbers for both employment and retail sales also make one wonder how accurate the GDP figures are, as they tell a different story.

Mr Cameron says he wants to carry on with his welfare reforms to show he is on the side of “those who work hard and do the right thing” He wishes to end features of the system which trap people in poverty and “encourage irresponsibility”.

He asks if it is a good idea that last autumn out of work benefits were increased by 5.2% in line with the RPI, when wages rose much less. This is a good question. If you wish to make it more worthwhile to work, raising benefits by much more than wage rises sets you back in your task.

He asks if it is right that Housing Benefit can lead to young people in benefit dependent households leaving home to set up their own benefit dependent household, when the children of working people have to stay living at their parent’s home for longer until they can afford a place of their own.

He asks if people who have been on out of work benefits for years should have to do some work in return for their benefit. He asks if there should be a higher rate of benefit for people out of work for a short period, reducing if they are not successful in returning to the workforce. He rules out the Clinton approach of removing benefits altogether from people out of work for a long time.

Looking at the size of the current welfare bill and the substantial increases recently reported, there is need for more reform. Welfare benefits are not high for most people who need to rely on them. There are too many people on them. The government needs to do more to encourage people off benefits. It needs to do more to limit eligibility in future for potential new claimants where Mr Cameron has identified unfairness in the system between benefit claimants and the rest of us. Some of this work needs to be done now, not later.

Germany has compromised. The bail out funds can be used to refinance banks directly, and to buy state bonds in the second hand markets after all. Although Mrs Merkel says she is against Eurobonds, using the joint credit rating to raise money for any part of the Euro union, she has in effect now agreed to this by the back door.

The problem with the new scheme is that they have to borrow the money to put into the bail out “funds”. If they borrow it on the credit rating of the bail out fund they have a kind of Eurobond. They are going to need to get on with issuing large quantities of debt to build up this fund. If they are going to beef up the funds with larger member state contributions, then Italy and Spain have to borrow more to help augment the fund, as they are around 30% of the total when it comes to credit status and contributions. We now need to watch their progress financing the funds.

I have been hearing about what the polls say. This matters, as polls help drive the attitude of politcal parties. They are one of the main ways politicians in their party groupings try to stay in touch and to understand the public mood. I personally tend to rely more on the emails, letters, doorstep conversations, web comments and the rest that I receive. The polls can provide some useful additional information, if the right questions are asked and the quantitative work is done professionally.

The polls confirm that the economy is the overriding issue to most people. The rising cost of living and unemployment dominate as concerns. People have been very worried about the price of fuel and energy, fares and Council tax, all items that goverment has considerable influence over through the tax and regulatory systems.

Immigration is the next biggest concern. People are very critical of the open borders policy of the previous government. They accept that the Coalition government is seeking to do something about it, but they want more progress and more results more quickly from the changes. There is very substantial support for cutting the deficit as a necessary precondition for economic improvement, and very strong support for moves to limit the welfare bills in an attempt to end the “something for nothing culture” which people think grew up on the fringes of the welfare system under the previous government.

The EU does not poll as a top concern. Attitudes to the EU are heavily sceptical, with only around one fifth in favour of all the powers and policies of the current EU. It is not clear, however, that there is a majority for simple withdrawal. Many want a common market type relationship, falling short of complete exit.

The latest figures for GDP show the trend we have highlighted here of rising real public spending continues. The first quarter of 2012 compared with the same quarter a year before shows public spending up 3%, household expenditure down 0.9% and exports down 1%. Over the first quarter government consumption grew by 1.9% on the previous quarter, whilst household expenditure dropped by 0.1%.

I am pleased to report that I have a letter from Defra apologising for quoting millions as billions, and billions as millions, in their annual accounts. They say they will amend it.

The UK government should say something like this:

“In 1972 the Uk joined the EEC. This was known as the Common market in the UK. In 1975 the then Labour government gave the UK public a referendum on whether they should remain in the EEC. The whole scheme was clearly defined by the leading politicians in favour as simply a common market that would promote more free trade and allow there to be more jobs in export industries for the UK. The public was told there would be no loss of sovereignty. Rumours of a gradual move to political and monetary union were downplayed or denied. The public voted Yes to such a Common market.

There was no majority then, and no majority subsequently for the UK to join a political and monetary union. The UK refused to join the currency union, negotiating an opt out from membership at Maastricht. The UK successively negotiated opt outs or preserved a veto for the Social Chapter, the common borders, common defence and security, common taxation and criminal justice. The Conservative opposition voted against the Nice, Amsterdam and Lisbon Treaties on the grounds that they still gave away too much governing power. The Conservative majority in the present government believes the UK needs a different relationship, as it does not accept the large transfers of power that have occurred in recent years.

We now find the Euro area members wishing to move further and faster towards a political union. They seek a banking union and a fiscal union of sorts. The UK cannot possibly join member states in such a move. As so many of the arrangements and Treaty agreeemnts are once again being reviewed, the UK wishes to review its relationship with the emerging political union it cannot join.

We seek a relationship based on trade and friendship, where the Uk will join other member states in doing things together where it is mutually advantageous so to do. If our signature is required on any new Treaty, we will need amendments for us that give effect to this wish for a different relationship.

The UK has been a good European by not joining the Euro. UK membership might have badly damaged the single currency by now, given the size of UK banks and the need for frequent currency adjustments both ways against the Euro over the last decade. As far as we are concerned the EU is a voluntary association of democratic states. Just as some states now want more EU power over them, the UK now wants less. It is important to accommodate both sets of wishes, to have a happier and more successful EU.

              Prior to the election I set out items I thought were missing from the government’s balance sheet that ought to be there. I estimated the bank liabilities from banks with government shareholdings, PFIand  PPP liabilities which are another kind of borrowing, and unfunded  public sector pensions.  I said that an incoming Conservative government  should and probably would set out these items for us all to see.

             So it proved with the Coalition government. They have published figures showing much larger state liabilities. On this site I have been criticised for failing to include the figures for the basic state retirement pension. I do not see this as a liability in the way government borrowing or PFI is a liability. The scheme has always been pay as you go. In that sense it is just like the NHS or the education service. We pay taxes in collectively, and those in need of these services receive the benefits.

             However, I have no wish to disappoint people who do wish to have in mind an even larger figure for state liabilities. If we take the 10 million Old Age Pensioners today, and multiply that by the £140 a week pension promised for the time after the forthcoming reforms, we get an annual bill of £73 billion. If you multiply this by 20 you get the rough capital cost of such provision, or £1.5 trillion. You could make it more if you allowed for further increases in pensioner numbers given growing longevity. I hope that makes my critics feel better!

           The long running Euro crisis is set to run and run. This week’s summit of EU leaders is no more likely to fix it than all the previous ones, each billed as the crunch summit to save the Euro.

           This time on the agenda is the prospect of a Euro area Finance Minister and Treasury. The Germans are making the perfectly reasonable demand that if they are to back up the credit card for all the Euro nations, they want a say in how much they spend using it. Euro area countries are being  reassured that this is no great loss of power. After all, they are told, you the member states can decide how and where to make the cuts. All the EU authorities will wish to do is to set a limit on how much you can spend, and a total for you to raise in tax. The rest is your call!

           To do this properly will take Treaty changes. That is a long and arduous process, requiring ratification by all the states signing the new Treaty. It should trigger the odd referendum in a country like Ireland, and Parliamentary ratification everywhere involved. It does not sound like a quick fix.

          The last summit offered a banking union as the answer. We are told there will be more progress towards this. Here again, Germany will want some guarantees that she will be able to control or influence the policy of banks in faraway countries, if her credit card is to stand behind all the main banks of the Euro area.

            The truth is simple. Too many countries in the Euro area have spent too much, borrowed too much and have now run out of money. Too many banks in the Euro area have overexpanded their balance sheeets, are losing money on too many of their loans, and now need more capital.

              The rest of the EU would like the UK to put some money in to help deal with the cash shortfall. There is no reason why we should do any such thing. Nor should the IMF, but they are now fully engaged with a cause they should avoid. There are no signs that the Euro crisis is about to be solved. There is no evidence that the German people are ready to put the German credit card fully behind the troubled areas and banks of Euroland. If they are not willing to do so, why should we?

               The Euro remains an orphan currency in search of a country to look after it and support it. Creating a country called Euroland is taking too long for the good of its currency. The rich areas and countries are not willing to prop up all the poorer and weaker countries and institutions. There are now five countries needing special measures and special subsidised loans. It cannot go on like this. The UK government has a duty to ensure not a penny of UK taxpayers money is wasted on this scheme. It now looks as if the obligations of Euroland are also too big for the German state to taqke on, even if she wanted to.

           It’s good news that today the Chancellor has announced he will not press ahead with a 3p a litre fuel tax rise this August. He has listened to those of us who have warned about the impact of fuel prices on living standards and inflation.