When I wrote the Economic Policy Review with colleagues before the last election, one of the most striking findings we highlighted was the persistent outperformance of the London economy compared to the rest of the UK. 

          Indeed, we discovered that the further from London you went the slower the growth. We also reported that the regional economies in the UK that received the largest subsidies and the most government  assistance and intervention performed the worst.

           Some of you are ready to leap to your keyboards to say that you should not claim cause and effect when of course government spends more and intervenes more in parts of the country with poor prospects. Let me spare you the anger. Part of the reason the poorer parts of the country receive more government help is that they are poor to start with. That’s why governments of all persuasions send them more money. They are locked into a single currency with London, so they need transfer payments to survive.

            The poorer places receive tax revenues from the succesful parts to pay the extra benefit bills for the higher levels of unemployment and disability. They receive larger grants per person for their local authorities, schools and health services, as the payments nationally are weighted to give more to disadvantaged areas per head. They are the main beneficiaries of regional policy, with a wide range of grants and public capital spending. Conservative governments treated them more favourably than richer areas. Labour then did it on an even grander scale, with large increases in public funding.

              So one of the questions I wish to ask today, is why didn’t it work? Why didn’t thirteen years of large increases in public spending, with the poor areas the main beneficiaries, lift them into success? Why didn’t the preceeding twenty years of favoured treatment establish the ground work for the success of the last Labour government’s big bazooka approach to spending?

              The left wing myth makers think Margaret Thatcher had a downer on Northern industry, deliberately closing heavy industry in the 1980s and leaving the communities without jobs and hope. As so often , this good story is ruined by a few facts. Much of the  industry – steel, shipbuilding, aerospace engineering, car manufacture, railways  and energy – was nationalised. In the 1960s and 1970s under Labour all these industries sacked a large number of people, confirming a trend which continued under both the last Conservative and the  more recent Labour governments. Neither party intended to do that.  It just happened. The industries were not competitive, and foreign competition stole the jobs. Monopoly or oligopoly nationalised businesses regarded politicians as their main customers, seeking subsidies, instead of concentrating on selling good quality affordable product at a profit making price.

          As examples, the National Coal Board had over 700,000 employees in the early 1950s. This had fallen to 400,000 in1967 and to 235,000 by 1979, on the eve of Margaret Thatcher in Downing Street. British Rail shed more than 300,000 jobs between 1950 and1967 . The Electricity industry fell from 220,000 employees to 160,000 employees between 1968 and 1979.

        The collapse of steel making and shipbuilding was pronounced in the 1960s and 1970s as well as in the 1980s. It was a progressive collapse, despite or because these industries were heavily subsidised and centrally directed for much of the time. Labour like to forget that much of the decline occurred on their watch between 1964 and 1970 and again between 1974 and 1979. Industry continued to fall as a proportion of the total  between 1997 and 2010.

          Labour and Conservative governments have tried a variety of responses to this de-industrialisation. Neither so far have succeeded in arresting the downwards movement. There have been Enterprise Zones, various tax incentive schemes for investment, inward investment promotions and subsidies, regional aid, EU programmes for the worst hit regions, and the large injections of public money for a wide range of programmes. They have tried education and training, apprenticeships, the construction of infrastructure, environmental improvements, direct subsidies and offers of public sector land.

          Some companies have proved that you can make things in the UK to the highest world standards at a competitive price. Several leading motor manufacturers have come to the UK and set up world class factories. Aerospace engineering, pharmaceuticals , food manufacturing and a number of other areas show that the UK can combine excellence with innovation. Despite this, unemployment and lower incomes have remained obstinately persistent in some parts of the country where industry used to be central to employment.

           London has pulled away from the rest, especially by concentrating on fianncial and business services, media and lesiure and other newer areas of activity. London’s industry has declined with the rest of the country’s. London’s  landscape includes the husks of old power stations, the remains of old docks and wharves, and the reshaped profiles of old factories and warehouses. In London now they usually house people in new flats or smart offices, carved out of the remains of a former industrial heritage. London does  not regret the passing of these old lifestyles. It moves rapidly on to a better tomorrow. One of my grandfathers made his living shoeing horses for the brewery trade. It was not a skill which could even see him out, and not something I ever wanted to do or thought I had a right to inherit as a way of life.

 

 Yesterday I argued that the US was not growing faster than the UK because it was enjoying a larger fiscal stimulus. Most of you agreed, but some were extremely sceptical of the quality and sustainability of US growth. Today I wish to look at the factors that are assisting the US growth rate. I understand that there is still too much unemployment in the USA, and that some people’s living standards have been badly squeezed. However, the official figures drawn up under  international public sector accounting conventions do show faster growth in the USA last year and this, than in troubled Europe.

Some have rightly observed that the USA now has very cheap energy in the form of low priced gas, thanks to its enthusiastic embrace of shale gas. Mr Obama was dismissive of Sarah Palin’s “Drill baby, drill” remark when asked about energy policy, yet his administration seems to be adopting it as a practical means of cutting energy bills and providing a big stimulus to industry. The Uk needs to pursue cheaper energy policies, as I have often argued here.

The USA is riding the digital revolution well. The US still has that energy and dtermination which produces huge corporations from new technology and new market opportunities. The USA has moved on from the Microsoft generation to the Facebook and Google generations. Large US corporates lead the field. There is in the USA a zest for enterprise and success which is often lacking in Europe.

Government helps reinforce this with lower income and capital gains tax rates than in much of the EU. The top rate of income tax is 35%. The top 1% in the USA pay an even bigger proportion of total income tax  than in the UK.  The US has a no nonsense regime over out of work benefits and availability to work, which makes the US labour market more dynamic and successful.

The USA fixed their banks more quickly than the Europeans after the Credit Crunch. Businesses and consumers can now get access to credit more readily than in Europe. They allowed house prices to fall further and faster,and wrote off the losses more rapidly.

 

 

          All the so called neo-Kenysians are out and about telling us that the US is recovering well owing to further fiscal stimulus, whilst the UK is said to be faltering thanks to a government “cutting too far and too fast”. It is time to debunk this nonsense.

           Let me start by saying I think Keynes was a great economist. His insights into the creation of money, inflation, and growth are important. All mainstream political parties are heir to his traditions in several respects. All agree that the state should borrow to offset a fall in demand in a recession. All agree that there needs to be controls over money and credit creation with a monopoly money system organised by the state. The Central Bank has to decide on overall levels of money and credit. They do not, however, tend to follow his precepts in a boom, when they ought to be asking the state to control spending and repay debt.

             The figures for the deficits in the USA and the UK show that the US has a smaller fiscal deficit, and it is falling more quickly. The US public sector  borrowed 8.7% of GDP in 2011, and plans to borrow 8.3% in 2012 and 5.5% in 2013. In contrast the UK public sector borrowed 9.5% of GDP   in 2012-11, 8.5% in 2011-12  and plans to borrow 7.7% in 2012-13. The UK deficit is larger each year, and falling less.

             Whilst the Federal government has not been keen to cut spending in an election year, states’ spending has been cut in many locations to bring the overall deficit down.  Total US public spending  rose by 2.2% in 2011,  is forecast to rise by 3.8% in 2012 and by 2% in 2013. UK current public spending  rose by 4.8% in 2010-11, by 2.9% in 2011-12 and is forecast to rise by 2.6% in 2012-13.UK  capital spending is falling slightly over the same time period. The main cuts in capital spending occurred in the revised Labour plans before the General Election. The UK public sector accounts for 45% of GDP. The US public sector accounts for 40% of GDP.

             Of course it is true that UK inflation has been higher. However, in the public sector with a wage freeze it should be considerably lower, given the high proportion of wage expenditure in the total. It is also true that as an economy grows the deficit should come down as revenues pick up. If the contrasting performances of the two economies proves anything, it appears to prove that an economy with a higher proportion of public spending in total GDP with  a higher level of public borrowing performs worse than an economy with lower figures.

 

 

                Yesterday in Parlliament the Leader of the Opposition could hardly wait to get through a couple of questions on the economy, to get on to the issue that fascinates the political and media classes – themselves. The latest revelations about the relationships between the Murdoch media and the present government caused the downfall of a Special Adviser. They leave the Culture Secretary making the rogue adviser defence, saying that his Adviser said and did things he should not have done, but they were unauthorised by his  boss. The Leveson Enquiry is likely to find that the relationships between politicians of both main parties and the Murdoch press have been close, with both parties  competing for favourable coverage and backing. As far as the public is concerned, they want an economic recovery and want more attention on jobs, savings, and prices.

                 The age of spin has encouraged the strange idea that a party or an individual can maintain a good press whatever the reality of their actions and their consequences. To hear that politicians rang up leading journalists to ask how obviously bad events might be covered shows a curious naivety about the way the world works. It does not matter how many spin doctors a government employs, how much it has courted leading commentators: if it does not deliver a reasonable outcome for the public  it will be the object of criticism or abuse. It makes more sense to me to spend more time trying to get the policy right, and less time worrying about the headlines. If a party holds public support because it is delivering a good result, it will  find that the press is less hostile. Newspapers have to sell daily to the electorate. If the electorate think from their own experience that the government is doing a good job that will tone down the daily abuse Ministers can expect from a sceptical public and a free media.

                The Coalition government will find its press improves as and when recovery picks up, as people find there are more jobs, as real incomes start to rise. Low poll ratings and a poor press are the result of a continuing squeeze on living standards brought on by the tax rises needed to pay for all the extra public spending of the last few years. The government needs to show the value of that spending if it is to justify the tax rises, or get better value from spending so it can get the tax rises down a bit.

                     There needs to be a credible message of hope – we want to know the sacrifice of the tax rises is worthwhile and will deliver higher standards of living and quality of public service. I was pleased to see a few articles picked up the obvious but neglected point that current public spending continues to rise in real terms. My main contribution to the public debate seems to be to read the government’s numbers, which so many commentators decline to do  so they can make up stories not based on the reality of the public spending patterns. Many of them continue to talk about austerity as if it was a phenomenon confined to public spending, when it is primarily a reduction in living standards for the many, a reduction which started under the past government thanks to a big recession and has continued under the Coalition thanks to tax rises and inflation.

 

 

The headline figure of minus 0.2% for economic growth in the first quarter of 2012 may be revised at a later date. It confirms that the economy is becalmed at best. It will doubtless lead to more demands from some to raise public spending and borrowing, to provide an additional fiscal stimulus. Readers should look more carefully at the underlying figures before rushing to such a false conclusion.

In the first quarter of 2012 government spending once again made a positive contribution to total output, contributing 0.2% real growth to the economy. Meanwhile construction, minining and quarrying fell sharply. It is interesting  to look at the last five years of numbers, to see that over this period the government sector has been used to provide a large boost, but this has not  offset the  whole decline in total production industries output.

Year	Change in Production industries	Change in government output
2007	plus 0.5%	plus 1.0%
2008	minus 2.8%	plus 0.4%
2009	minus 9.0%	plus 2.3%
2010	plus 1.9%	plus 0.7%
2011	minus 1.2%	plus 1.5%
Totals 2007-11	minus 10.5%	plus 6.0%

These figures are all in real terms, adjusted for inflation.

So over the last five years government has provided a large stimulus to total output, but the manuafacturing and mining sectors fell dramatically in the Credit Crunch of 2008-9 and have recovered very little since. The issue we need to address is how to create a faster private sector led recovery. The government has spent massively to offset the impact of the economic decline, which has entailed very large borrowings. Borrowing even more would be counter productive, as the private sector woudl have to pay the interest on the debt and ultimately repay the loans. The issue is how to get faster growth in the private sector, which is about all the issues on banking, taxation, regulation, transport and enegry that we often discuss here.

Yesterday I asked in Treasury Questions what the extra £64.6 billion current spending this year is being spent on, compared to 2009-10. The Chancellor did not have time to itemise the main increases, so I thought it would be of interest to set out what they are spending the extra on. I appreciate these are all cash sums, so where pay and prices have risen some of the money is needed to pay for such increases.

The biggest increases are on benefits. This year benefits are scheduled to cost £7.1 billion more than last year, and £19 billion more than 2009-10. Gross Interest charges are forecast to fall by £2.6 billion this year compared to last, but are up by £13.9 billion compared to 2009-10. Tax credits rise by £500 million next year, and are up by £3.1 billion since 2009-10. Net Public service pension payments will cost an extra £3.2 billion this year compared with last, and are up by £6.9 billion compared to 2009-10. Local Council current spending will rise by £600 million this year against last, and by £1.7 billion compared to 2009-10. Overseas Aid, Health and educational spending also rises, within the Departmental spending totals. Payments to the EU are said to fall by £400 million this year, but are up by £900 million compared to 2009-10.

2011-12 total borrowing came in on the target £126 billion extra in the figures announced yesterday. There were some signs of year end additional spending, as is the usual public sector pattern.

            The  news yesterday that the Treasury is asking all departments to draw up a contingent cut of 5% each is an interesting development. It only applies to about half of public spending, but is still a serious sum. The stated purpose is to have cuts available should the need arise to offset other increases in spending.

             Readers will know that I advised the government to spend around £30 billion or 5% less in the first year of this Parliament than they decided to spend. Where they put spending up  by 5.3% in their first year   I suggested keeping to a freeze.  Thereafter I accepted their profile of percentage cash increases, though I would have preferred a slower rate of increase in Year 2  and Year 3 and a faster one in Years 4 and  5. That would have saved us at least an additional £150 billion of borrowing over the five years compared to the government’s plan. I thought if we had done this there was a chance of getting through without the need for further cuts, and with a better prospect of a private sector led recovery.

              I hope the Treasury’s request will lead to a more informed debate about how much spending has increased by in recent years, and on where it could be reduced without damaging important front line services like hospitals and schools. It should also lead to a proper debate about why public sector inflation has been so high in 2010-11, and whether public sector inflation is now going to collapse given the pay freeze in place.

                 The government inherited a public sector that did not show good productivity growth, where quality and productivity were falling behind good private sector standards. We need to hear more from DWP about how they are reducing the error rate on benefits, more from each department about how they can manage numbers without incurring large redundancy bills, how they can do more in house without recourse to so many expensive external consultants, and how they can  dispose of surplus assets like property.

              We have spent two years mainly discussing how to squeeze more money out of the private sector by a wide range of extra taxes and public sector charges. Listening to Mr Cameron yesterday morning it sounds as if the government now wants to do more for all those who pay their own bills and have to pay these extra taxes. To do so he needs to get a better grip on value for money in the public sector. Let’s hope we can now have as much media interest in how every pound of tax is spent, as we have recently had in how it is raised.

 

              David Cameron has enjoyed two great successes as Prime Minister.

               He led western opinion on the subject of Libya, worked with France to intervene militarily, and  presided over a successful military intervention which helped the rebels bring down the dictator. I did not myself think this a good way to spend UK money and risk lives, but I  accept that he did it well and his international reputation was enhanced by it. It would be churlish to deny him the credit he is due for the successful action in its own terms.

                More importantly, he did refuse to allow the UK’s name to go on a new Treaty for fiscal austerity in the EU, and forced the partners to come up with an intergovernmental Treaty of 25 instead of an EU Treaty. This made him extremely popular with the public, reaching a temporary high of support. Conservative MPs including me were delighted by what he did, and hoped he would go on to develop a new relationship with the EU on the back of it.

                  Meanwhile, the government he leads has been struggling to assert its authority in a  number of areas. The Home Secretary is the most recent to admit that she cannot simply extradite a suspect for trial elsewhere owing to the entanglements of the European Court of Human Rights. The Immigration Minister, battling to implement the Prime Minister’s popular pledge to cut migration numbers susbtantially, cannot assert much control over the UK’s borders with the rest of the EU owing to the loss of powers in this area  under the last government.

                The Foreign Secretary cannot suddenly lift the sanctions on Burma following political progress there in the way he would like, owing to the EU control of our sanctions policy. The Chancellor finds himself offering large loans to the IMF at a time when his policy intends to clamp domestic public spending, owing to international agreements and understandings. The wide ranging work on benefits reform is hedged around with EU requirements concerning the payments of benefits to non UK EU nationals. Ministers are off to court to try to get a better answer for Britain. Local government Ministers had to go through various legal processes to assert their new planning policies.

                 The task of government is difficult enough, without Ministers being frustrated by international powers and other forces that seek to prevent or limit what they can do. It seems to me inevitable that in order to be able to govern our country, government has to negotiate a new relationship with the powers that bind us. The public want their government  to be able to act in the UK’s interest. In all to many areas the ECJ, the ECHR, the EU and other bodies make that difficult if not impossible.

                  Some Conservative MPs are pressing again for the UK to have its own Human Rights Bill, to be policed and adjudicated in British courts. Work is also well advanced on a wide range of powers that we want back from the EU. In order to govern well, a government needs to have the powers to make decisions and enforce them, subject just to the checks and balances that come from answering to Parliament, and under the rule of UK law which Parliament itself determines.

 

           Every week when Parliament is in session the executive of the 1922 backbenchers committee meets to decide what to tell the Prime Minister about backbench attitudes and reactions to the government’s business. The full 1922 Committee also meets every Wednesday, where any Conservative MP can attend, and voice any criticism in the privacy of the meeting  they wish.

            I have never before written about these meetings. They are best kept private. Sometimes they are unremarkable. Sometimes they express support for a Minister or a policy. Sometimes we summon a Minister to  get a progress report or  home in on problems that matter to us. The Chancellor comes for a consultation meeting with us before a  budget when he is forming his measures. He comes after budget to report. The Prime Minister comes once a term to tell us how he sees things and to take our questions. Sometimes these meetings  send tough messages, wanting change to what the government is doing or how it is behaving.

               On Thursday, as some of you will have seen from widespread press coverage, there was an extraordinary meeting of the 1922 Committee to discuss government plans to reform the House of Lords in the next session. It was billed as extraordinary because it was on a different day, in addition to the usual weekly meeting, and was designed to handle just the one main topic.  Someone present must have  decided to ignore the normal confidentiality and tell the press about some of it. It turned out to be extraordinary in more ways than one.

                It became clear that Conservative MPs do not want any Bill on Lords reform in the next Queen’s speech. The Conservative party, like all the main parties, is divided over how to reform the Lords. Some want an all elected second chamber. Some want a  hybrid chamber , with some elected and some selected, like the Bishops. Some want selected peers but wish to see reform of length of service, retirement dates, reduction in numbers and other changes. Some want it left alone, thinking it is fine as it is.

                           However, last week  consensus broke out. Practically all  decided that a Bill on Lords reform this year would be wrong. At a time of major economic crisis in Euroland,with the need to battle down the deficit at home and complete major reforms of welfare and public service, there was no appetite to open a new front by taking on the Lords. All reported a complete lack of interest from constituents in this cause. Many thought the politicians would look even more out of touch if they went ahead with a Westminster issue at such a time. How would it look to be discussing new high pay and allowances for Senators, replacing much cheaper current arrangements, when the debate is meant to be about cutting public spending?

                      I now read that this “rebellion” had some official stimulus. If there were, it was well hidden. None of the colleagues I spoke to had been asked to be present.  None had been given the wink that this was something they were allowed to rebel about. It seemed that many MPs for varying reasons had decided they needed  to warn the government now,before they put such a Bill in the Queen’s Speech, that its passage would be troubled at best, and probably dependent on Labour votes.

                           Many feel that such a major constitutional change would warrant a referendum. After all, if voting systems and elected Mayors qualify for a referendum then so surely should major Lords reform. Labour too would want to vote for such a referendum. Many Conservatives would wish to add that if we can have yet another constitutional referendum on something  we don’t want to change,  could we not at the same time have one on something we do wish to change, our relationship with the EU? There is concern that the Bill may include electing   the Lords by a system of proportional voting, so soon after the public decisively rejected such a voting system for the Commons.  What part of “No” did they not understand?

                        I hope the government is wise, and grasps that this is a topic which needs further discussion and  thought. It might be a good idea to seek a consensus first on what the Lords is for, before moving to thinking about how to choose its members. Now is not the time to legislate. I have never seen the Conservative Parliamentary party so at variance with its front bench on a single issue.

 

I recently posted the government statement of what they are doing about immigration because I know how important this issue is to many who read this site. Some of you were grateful and surprised by how much action the government is taking. Others cynically complained that it was all words, pointing out that over the last year there has still been a high level of entry.

I have listened carefully to Ministers and talked regularly to them about what they are doing. I am quite sure they wish to control numbers, and are taking actions which they believe will do that in a fair and sensible way. They are well aware that so far the numbers have not reduced, but point out that it takes time to get each of these measures into effect and to ensure they are working well at each entry point into the country. They accept that the proof of their measures comes over the next year, when they expect to see results. They are of course ready and willing to examine other ways to achieve what they wish to achieve, especially if the numbers do not decline  as they expect.

The Coalition has never said it intends to change the arrangements for EU migrants. It so happens this is not the bulk of recent inward migration. The Conservative side of the Coalition always negotiated opt outs for the UK from the common borders when in government, as we regarded it as very important to keep control of our own borders policy. The last Labour government changed that, and put the UK under more of the EU measures in this area. Conservatives campaigned in 2005 and 2010 to get powers back from the EU. The last election manifesto did not specify all the  areas which would figure in a renegotiation , but many Conservatives would wish to include borders in such a process. Most of these moves were prevented by the Coalition Agreement, and cannot be pursued without a Commons majority for them.