As predicted, RBS continued its glittering run of losses. There is no whiff of a dividend for long suffering taxpayers in our role as forced shareholders.

According to  the bank it deserves applause. They could, they argue, have lost so much more. They have, they proudly tell us, shrunk the assets from an eye popping £2.2 trillion  to a tidy £1.5 trillion. I seem to remember them  saying they would slim down to a mere £1.2 trillion, but that seems to have been yesterday’s plan, not today’s. They rejoice in telling us Investment banker bonuses are down this year compared to last.

I think taxpayers will find this all very difficult to stomach. The banker bonuses are down,  but so are the profits of the Investment Bank. Meanwhile base pay for some  is up according to the media, at a time when people in other loss making businesses are usually told there will be no pay rise whilst the company is trying to make a profit. What’s so different about RBS? Well, it has the government and taxpayers bankrolling it. RBS tell me the top paid people did have a pay freeze.

They lost money in Greece, and they lost money in Ireland. What part of the Euro crisis were they unable to forecast? They tell us the core bank is now profitable and successful. So are the other main private sector clearers in the UK. Given the charges and loan rates they impose againmst a background of very low official rates, it would be surprising if they managed to lose money.

Slimming a balance sheet is not necessarily a difficult task. RBS has large trading book positions and large positions in derivatives. These should be wound down by netting off, by sales, by allowing expiry of contracts. Taxpayers should not be running these sort of risks on the scale of RBS. Any competent financier should be able to do this in an orderly way. Bad loan books do require skill in handling and some patience. Good bankers know which loans will never be recovered, and close them down promptly, whilst cutting some slack to borrowers who may be able to change their fortunes and honour their debts.

What should be done with RBS? It should be broken up. The government should create three good UK banks out of the assets and liabilities of RBS, and float them off. They should raise new private sector capital as they go. The government could even get some money back for them if it constructed them sensibly. Taxpayers would be left with the bad bank, which would need continuing Treasury guarantees: we already own these doubtful assets and have to stand behind them anyway.

An alternative proposal is to give the shares to UK taxpayers. Taxpayers would only be able to sell them when they were above a specified price, and would have to send a specified part of the profit to the Treasury. This scheme looked sensible when the RBS share price was higher. The taxpayers could have sold above the government’s purchase price, and reimbursed the government on sale for the whole of the government’s purchase cost. That all looks fanciful at the moment, as RBS shares are so far below the UK government’s purchase level.

Meanwhile, back in the real world, we seem to be lumbered with the idea that the whole of RBS is going to be turned around, and in due course taxpayers will be able to get their money back by selling the shares. Looking at the last two year’s results, that is all a long way away. RBS is not a natural unified bank. It is an ugly congomerate of interests that do not fit together. It has done itself no favours by its handling of the rewards  of the Investment bankers, and creaming off too much of their profit at a time when large losses are being made elsewhere in the Group. If the Investment bankers want to make loads of money they should buy their bank off the taxpayer, and then they could pay themselves what they like. All the time they are punting with taxpayers money, and are part of a loss making group, their remuneration will be a highly charged political issue.

RBS in its current form does not look like proof that capitalism does not work. It looks like proof that socialism just generates bad results and disappointment, as yet another nationalised company gets into the habit of living on subsidy and delivering losses.

             It is predictable and sad that the south of the UK is threatened with water shortages.

             I remember urging the last government to put in more reservoir and desalination capacity. I asked in my news  release whether they wanted to greet Olympic athletes and visitors  to London in 2012 with words telling them to cut down on the showers and avoid using too much water.  Apparently they did want that, and sure enough it is coming to pass.

             There has to be a reason why an island surrounded by big seas where people worry about rising sea levels, with massive rainfall in many parts of the country, is unable to supply sufficient water for its population. The reason is simple. It is that we still choose to supply our water through local monopolies that are heavily regulated “in the public interest”.

             Potential challengers to the water monopolists find it difficult to get access to water supplies and access to the market for a variety of reasons. They are prevented from offering an alternative to  most consumers.  

               It is instructive to compare the bread and water industries. Both are important to life. Bread is a competitive more lightly regulated industry. I do not recall bakers poisoning their customers. I do not remember the industry issuing warnings that we will have to be put on allocation or rationing. They do not announce at Easter or Christmas when there is a rush to buy more bread,  cake  and buns for family feasts that there is Christmas cake or hot cross bun temporary suspension owing to too much demand.

              In contrast the water industry has been through some worrying water quality issues affecting supply. It is already telling us to use less of its product, and saying that there may have to be bans on garden water usage this summer. It is arguing that the reason is low rainfall this winter.

                 The bread industry does not use poor grain harvests as a reason to make less bread. The water industry seems to think that it can meet the ever rising demand from water stemming mainly from the growth of population in London and  the south East without putting in more capacity. We need to ask why? The industry also seems to think it is fine to assume heavy rainfall, and then to take it out on customers if it does not occur.

                Some people argue it is not green to use too much water. This is bizare. You cannot destroy water. There is a water cycle. All the industry has to do is to collect and clean it. We then use it and return it to the system. Of course government has to stop companies taking too much water out of streams and rivers so they dry up. Water companies collect a very small proportion of the water available. There is plenty of scope to expand supply without damaging rivers. I attended a meeting yesterday with representatives of the industry and regulators. The government’s White Paper wishes to strengthen competition. I proposed they go a lot faster and further in doing so. Without competition we will continue to have dear water, and occasional rationing.

             Let me court unpopularity. I am going to defend the City of London.

              The Global Financial Centres Index ranks London as the world’s Number One Financial Centre. It stays a little ahead of New York, and Hong Kong, which have been fairly consistent as the top three for some time. The only other European centre in the top ten is Zurich. Four top ten centres are Asian, and four are North American.

              Many countries would give a lot  to have a top ten financial centre. It brings jobs, incomes, and other business on the back of the financial transactions. The Euro area has been trying for some years to knock London off its perch, and replace it with a unified Euro centre in Frankfurt, allied to Paris. After more than a decade of the Euro, Frankfurt languishes at 16 and Paris at 24 in the league.

                 Centres like Hong Kong, Singapore and Shanghai have studied London’s success and try to emulate it. Only in parts of the UK, the host country to the London markets, does there appear to be so much antagonism to what the City does and what it stands for.

                  The German government acts as host and regulator to a similar success story in world automotive engineering, though Germany does not manage the world number one slot for volume of cars made. You do not hear the German government trying to impose regulations against the expensive and fuel hungry vehicles German industry specialises in making to sell to the rich of the world. There is no push to set an automotive transactions tax. There is not the same jealousy drive to convert people from Mercedes and Porsche to something more practical and mundane.  Even the active German greens are handled in a  way which preserves the interests of the motor industry which does so much to sustain the German economy.

               Similarly the French government acts as host and regulator to the world class French wine industry. French governments do not spend their time exposing the dangers of wine based alcoholism. They do not think up special tortures for people daring to make wines that only the very rich can afford to buy. They take pleasure in producing wines in France that can sell for thousands of pounds a case. They do not propose to cut their deficit by a special levy on wine producers.

               The UK takes the City’s pre-eminence for granted. Politicians of various parties delight in thinking up more new ways to extract more tax revenue, and to expose what they see as the immorality of the actions of some working in the Square Mile.  The large revenues that the UK government does draw from the financial industries are crucial to paying for the NHS and wider welfare system of the country.

               Is this pre-eminence in danger? Are most right to be complacent, thinking  that the City will always be there as the world’s number one whatever we throw at it?  Surveys show that tax, regulation and transport feature prominently in people’s decisions on where to locate their financial businesses. They do not look for the lightest regulation – they look for the right mixture of effective and credible regulation with sensible costs. They do not seek the lowest tax rate available, but if you push the taxes too high it does start to drive talent away. They accept that the price of wanting a great City with good restaurants, cafes, galleries, theatres and schools is some inconvenience to travel. However, if you let your transport system deteriorate too much it can cost you business. There are more beautiful cities around the world than there are top ten financial centres.

                  The UK needs to look after the City, as it is one of the outstanding sucess stories of the UK economy. A medium sized country does not achieve greatness in many areas, so it is important to reinforce success, not undermine it.

                  It was interesting to see in the figures for tax revenues and spending yesterday that Income Tax is now only up 2.4% on a year earlier.  It looks as if the 50% rate is having the predictable effect of lowering revenue. Yesterday’s better figures for borrowing were helped by very buoyant VAT and Corporation Tax, offsetting the very poor Income Tax performance. Recent figures are not conclusive proof of the power of the Laffer curve – I have presented that evidence for CGT here before. However, it is an interesting fact that revenues from Corporation Tax surged,where the government  is undertaking a phased programme of cutting the rate, whilst revenues from Income Tax spluttered, where the government imposed a large increase in the top rates.

           We learn that the Foreign Office and doubtless the State Department are most concerned that Iran is fast approaching the ability to produce nuclear weapons. Let us suppose that on this occasion the intelligence is correct. We know that intelligence about weapons of mass destruction  was false in the case of Iraq.

             We learn that the authorities argue that once Iran has these weapons there will be  a rapid arms race to have them elsewhere in the Middle East amongst the neighbours of Iran. This leads some to argue that the west has to seek to stop Iran from arming, by threats, sanctions and diplomatic pressure. If all else fails, they cannot “rule out” military force.

         It is true that diplomatic threats are more likely to succeed if the country on the wrong end of them thinks the west may invade. There is plenty of form to leave enough doubt in the minds of such a country for the threat of force to have some impact. Any dictator will have learned something from the end of the Iraqi and Libyan  dictators.

         The ideal outcome is that Iran backs down from making such weapons, faced as she may think she is by an ultimatum.  The worst outcome is if the west threatens too far, Iran does goes ahead, and the west is left with the dangerous choice. Invasion may bring a war too far. Failure to act undermines  future use of threats as a means of coercing better behaviour.

          History is no simple guide to what might happen. Kennedy’s threat of force if the USSR kept pouring missiles into Cuba was believed and the Soviet ships belatedly turned back, ending a very dangerous crisis. The Soviet suppression of democratic rebellions in Hungary, Czechoslovakia and Poland  was ignored by the west. The USSR had correctly worked out there would be no western military support for the rebels. The west took no action to take various states from gaining access to nuclear weapons. The west allowed Pakistan to remain as an ally, despite harbouring anti western terrorists and holding nuclear weapons. In Iraq and Libya the dictators took a gamble about western action, and lost.

          The problems for the west are several if the west continues to take a strongly interventionist approach.  Intervention does involve killing a lot of people. It means backing one side in a civil war which may include a number of groups that are no more desirable by western standards of civil liberties and democracy than the groups they are fighting. There is no guarantee for the west that once the task of evicting the old government is accomplished, there will be a smooth passage to a new government which meets with the approval of the west and has sufficient consent at home to be credible and successful.

           I understand that the world is an even more unstable place if Iran has nuclear weapons. Using military force to stop that might not make it a more stable place.  Maybe the best we can hope for is enough uncertainty of our intentions for diplomacy and pressure to have a chance of success. Pulling the trigger on another military intervention in this dangerous part of the world is not something I would want to do myself. Isn’t it time that the threat of force was made by countries nearer to the problem, with more money than we have to spend on such things? All of this is best carried out by the UN, with the forces supplied by countries most closely involved with Iran. The UK has shed all too much blood and treasure in recent Middle Eastern wars. There is no need for the UK to seek to lead world reactions to Iran.

          Today in Parliament at the instigation of the Backbench Business Committee we will be debating Iran.  Many of us feel it is high time Parliament debated the whole question of UK intervention in the Middle East. We need to review what has come of wars in Iraq, Afghanistan and Libya. We need to ask again the fundamental question, can you wage a war on terror? We need to ask, how far should the west go, if at all, in insisting on regime change where we do not approve of the government.

          I want the UK government to recognise the strong limits there are on how much political influence the UK does have and should have over who governs in each Middle Eastern country.  We believe as part of  a group of leading western nations in the self determination of peoples.  We fought successfully to liberate Kuwait from an invader. Most of the neighbouring countries agreed with us. We fought successfully to free the Falklands of an invader. As allies with the US we fought for the self determination of the western European peoples to free them from Nazi domination. There is a case for the UK and her allies to intervene on the side of an oppressed country if it has been invaded and its government changed by force from outside. This is best done with UN support and with a multinational force, to abate any suggestion that the motives for the intervention are other than to restore legitimate national authority. We did not intervene to uphold the right of eastern European peoples to self government during the Soviet terror. We judged it would have killed too many people to do so.

           The more recent doctrine in Libya has been based around the proposition that where there is a civil war, with a strong opposition coalition of internal  forces seeking to bring down the undemocratic government of the country, the west can with UN backing move in and help the rebels. This doctrine does not encompass such western action in Syria.  This is partly because Russia and China block UN support for such intervention. It is also partly because the military task would be more hazardous and the opposition forces are less strong and focused than in Libya. The new doctrine is rightly flexible, responding to differing circumstances.

         In the case of Iran and her possible move to own nuclear weapons, neither of these doctrines applies. Iran has not been invaded from outside to need our help to restore national government. There is no strong opposition in  Iran seeking military help to topple the regime. The case of considering any kind of action against Iran, including diplomatic action and sanctions, is based more on the type of argument used to justify the wars against Iraq and Afghanistan. It is the progeny of the war on terror.

            The argument went for the war in Afghanistan that the Taliban were allies of the terrorists who attacked the twin towers. They needed to be displaced as the government of Afghanistan, for that government was harbouring terrorists who could do more harm to the west.  More than a decade on, and the main western powers are now in discussion with the Taliban over the future government of Afghanistan, recognising that depsite all the force expended they remain a political organisation of influence within the country.

           I always had difficulties with the argument about waging a war  against terror. Tomorrow I will consider the case in more detail.

            When I have been involved in turning round companies in difficulties I have always concentrated on managing the cash.  When the banks are becoming  reluctant to lend more – or want some of their money back – the business has to concentrate on getting more cash in and letting less cash out. It’s not just a question of spending less and trying to raise more revenue, though that is essential. It’s also a question of reviewing all the assets of the  business and seeing which ones can be converted into cash, and which are no longer needed.

             Stopping spending is a lot easier than the government seems to find it. You put in place a comprehensive freeze on recruiting people from outside, and only override this   if you need some specialist skill which you cannot find already on your payroll. You run down stocks of everything before allowing any more purchases. You review every item in your budget and ask if you could run the business without it in the future, or with less of it. You do without so many external consultants, asking your own managers to do more of the tasks.

             Finding assets that you do without, or assets which can be sold to others for cash is also usually an essential part of battling an overborrowed business back from the brink. Here the government is in strong position, as some of the past spending has built up a wide range of public sector assets. Some of these are of no immediate use to the public sector and can be sold for that reason. For example, there is plenty of spare land and should soon be some spare office buildings as the overhead numbers come down. Some are of greater value in the private sector than they enjoy when under public sector management. The commercial  forests – as opposed to the heritage and recreational forests – would be better off in the private sector and could raise the state some cash, as Labour used to do with their annual sales programme.

             Two areas I have identified where improvements could run alongside raising cash are the cases of service housing and motorways. I am pressing again for the service personnel to be given the option of buying their own homes where the MOD still owns them, with a right for the MOD to repurchase and sell on to a new staff member when the person leaves the services. This transaction would be at market price, so the individual would get the full benefit of ownership and have their deposit for their next home, assuming house price rises during their period of ownership. This scheme helps tackle the problem of homelessness some service personel face on leaving MOD employment, whilst producing a one off cash injection into the government.

           The question of privately owned and financed roads is more contentious. The aim would be to lease franchises, so the state still owned the long term underlying asset.Tthere could also be a system based on motorists opting in to paying tolls only if they thought they would be better off than paying the Vehicle Excise duty the tolls would  gradually replace. The government could then say that tolls only applied automatically to foreign vehicles, currently avoiding most of the taxes, and to commercial vehicles. Private motorists could opt between carrying on with their present level of tax, or switching part of their tax to tolls. Meanwhile the state would get a sum of cash for the franchises, and the motorist would have a manager of the highway more interested in keeping it open and earning revenue.

          The future is China’s for the taking. In the story so far, very hard working Chinese have built a huge surplus from successful exports. They have more than $3 trillion in the reserves. Millions of people have left the land and moved into more productive jobs in factories. China has grown to understand western markets, to design and produce goods that the west wishes to buy. She  has lent money back to the west to help maintain the west”s spending. She wishes to avoid dollar or Euro collapse, to maintain her competitiveness against these large currencies, and to protect her investments through her reserves.  There are many more Chinese who can move into better jobs, earning more for China. There is huge scope for Chinese expansion based on expanding domestic demand and higher wages.

           In her latest 5 year plan China recognises that there are limits to how much she can sell a west becoming very overstretched financially. She also is aware that the Chinese people will themselves expect to benefit rather more in the next five years from their energy and productivity. Chinese people will want to buy the fridges and cars, radios and cycles that China can produce in large numbers.

             China is now using her financial muscle to acquire resources and technology. She is buying into important raw material deposits around the world, recognising she will be the main consumer of these items and will need privileged access to them. She looks to the west for technology. China wishes to move rapidly to equal or surpass the  west at designing and making computers, tvs, cars, machine tools and the rest. She is prepared to buy into western companies with good technology to gain title to it.

             Some years ago I remember being asked by a distinguished Chinese visitor to the UK why the UK government  had not got behind one of its companies bidding for a Chinese project. The UK had not won the competition. My guest was explaining the importance of government engagement and backing to the Chinese purchasers of that time. I explained that the UK government had not been able to, owing to the fact that more than one UK company was bidding. The UK government does not see it as fair to back just one UK company and denigrate or ignore the rest. My Chinese visitor saw our competitive system as a weakness in this case. The UK government could not back one company and instruct others to back away from the competition, as China would have done in a similar position. China also grasped that the west is fairly free with the sale of companies and technology in many fields.

         China has learnt that competition does have its role to play. She has also learnt that freedom, competition and democracy western style can leave the west vulnerable to Chinese competition, and to informed Chinese buying of technologies and resources that have strategic significance. China has a different view of how to govern from the west. She runs a different system from competing party elections and western style law codes. She does have a developed system for listening to public opinion, and for trying to avoid protest or mass disagreement with government policy. 

          China is busily buying up gold, showing her worries concerning the west’s paper currencies. Whilst she talks about supporting the Euro, she backs gold. Maybe part of her strategy is to build a very large gold position, then one day to seek to remodel the world’s monetary system with a new role for gold. The UK’s short sighted sale of gold at low prices looks increasingly foolish, as Central Banks as well as individuals look for a safer haven than low yielding paper money subject to the vagaries of quantitative easing. The west needs to take seriously the Chinese success story. It also needs to be aware that if too much technology and too many raw material deposits are sold, earning our living will be more precarious and difficult.

               Recent figures revealed the extent of transfers between the regions in the UK sterling area.  It reminds us that the Uk is far from a perfect economic area for a monetary union, and reminds us that monetary unions are in practice expressions of nationhood. If we were only thinking of economic sense, London maybe with the South-east would have its own currency to reflect the very different financial position of that part of the country.

                As Alastair Heath of City AM has already pointed out, only London and the South east are in surplus, sending large transfers of tax revenue to the rest of the UK.  London is required to raise 45.2% of its GDP in tax but only spends 34.9% on public sector activities. The large surplus is sent elsewehere. Meanwhile the North East runs a deficit of 32.2% of its GDP, Wales 36% and Northern Ireland 40%. This extra public spending is paid for from London’s taxes and from UK wide borrowing.  London and the South east pay most of the 50% Income Tax and the high Stamp duties. Scotland is said to be in balance, but still borrows 10% of GDP for extra public sepnding.

                  It serves to remind us why the Euro is struggling. German taxpayers do not want to send anything like those large sums to Greece and Portugal that London sends to the north and west of the UK, as they do not feel they belong to the same country.

                 The huge imbalances between London and the western and northern parts of the UK are usually seen as a problem for London. The reaction of many in  the political classes is to see how London can be punished more for being so successful. Most of the higher taxes being talked of or imposed are mainly taxes aimed at London, as they aim at financial services and banking, at high incomes and high property prices. Much of this is concentrated in the capital.

                     The politics point in the direction of being anti London, as the tax base is very concentrated in the richer parts of the capital whilst the recipients of the extra tax revenues are widely spread around much of the rest of the country. For Labour it is a no brainer, as they represent areas in receipts of the transfers but do not represent many  of the places making the payments.

                   These underlying transfers account both for the brutality of rhetoric about public spending in much UK political debate, and for the prevalence of spenders over taxers. The tax base is highly concentrated and therefore vulnerable to political attack. The only question is how far can they push it until it emigrates on a large scale? Greece shows what can happen to the tax base if you push too far. Their income tax revenues are plunging as the rich and successful take their deposits, their assets and their businesses elsewhere. Meanwhile the UK sits back and discusses fairness and banker bonuses, confident in the knowledge that as most  parts of the country are in receipt of transfers many electors just want the government to raise more in tax and send the money.

PS: Some have asked about the sources. These figures come from the Centre for Economic and Business Research, and have been picked up by City AM. In the case of Scotland, for example, they do include North Sea tax on one side and Scottish levels of public spending on the other via the Barnett formula.

This site has drawn attention to fundamental problems with the UK economy as a result of the Credit Crunch and the huge increases in state borrowing in recent years.

The first is the broken banks. The authorities are relying on huge money printing operations. This money can only subsidise the public sector. The failure to sort out the state owned banks, and the decision to shift to much tougher bank capital requirements at the wrong point in the cycle mean the private sector is starved of cash for recovery.

The second is the  squeeze was placed for the first two years of the Coalition government on the private sector rather than the public sector. The government decided to bring the deficit down by large tax increases. It carried on with most of  the big tax rises of the outgoing government on incomes and employment, and imposed new ones of its own on capital gains, energy and consumption.  Energy prices also shot up as the full effects of the previous government’s  devaluation hit consumers. This resulted in a fall in living standards, cutting private sector demand when extra demand was needed to boost growth.

So what should the government do now? To fuel its much needed private sector led recovery it needs to change both these approaches. I have set out in detail how it can revamp the banks in its ownership, creating several strongly financed competitive domestic banks that could start to finance recovery. They could provide the money for new roads, broadband, water supply schemes, homes and all the other items the economy needs.

The Budget also needs to tackle the squeeze on incomes. That requires income tax cuts at all levels of income. It requires putting capital gains tax to a lower  level which will stimulate more business activity and increase the revenue it raises.  It means having a policy of affordable energy. Some of the tax changes wikll be self financing as they boost the growth rate. Some will need to be offset by spending reductions. Let’s start by cutting overseas aid to countries like India, and by demanding a better financial deal with the EU.

Meanwhile, we still need our productivity revolution in the public sector. Where are the new approaches to public service delivery? We do not need cuts to teachers or nurses. We do need new employee led service provision, more contracting out, more concentration on providing better value. And we still need to stop doing some things the government cannot resist doing.

                Greece has around one sixth the population of the UK, yet is has about the same number of military personnel on the payroll.  The Greek military comprises  around 170,000 active personnel paid by the state, with a further 280,000 in the reserve forces. Maybe instead of heaping ever more misery on the Greek private sector in an effort to pay for the very high Greek public spending the government should take a look at this cost.

                The Greek navy has around 80 warships. The army has more than 1200 tanks. The airforce has around 1000 planes and helicopters. (these are figures taken from public websites).  The question is, who should pay for all this?

                If Greece had armed forces proportionate to her size of country she would have far fewer military personnel and military vehicles, ships and planes. She would save a lot of money , bringing her budget deficit under better control.

               Greece argues that she needs this large military as she does not trust her neighbours. The west could offer her security guarantees – indeed they already do in effect. I do not believe the west would stand by  and watch any invasion of Greece, nor do I think one is any more likely than it has proved in the last few decades.  She probably argues that with recession now would not be a good time to sack a lot of soldiers. Greece believes that the EU and the IMF should pay for her military for a bit. She also believes her creditors should pay permanently for her past maintenance of these large forces, by writing off great chunks of her debts.

                     I am surprised the west has not suggsted other options to nervous Greece. If her allies could persuade her that any threat to Greece would be countered by UN combined action, the country could consider a substantial down size of her forces. There is no immediate need to lose the capability to mobilise rapidly if ever needed, if many more of her forces went over to being reservists.

                     The plan could be to ask many on  the current military payroll to go over to part time contracts, encouraging them to find other work for the time they are not being paid in the military. Success in finding other work could be followed by conversion to reservist, where the individual was paid a retainer and came for a specified period each year to keep up basic training and learn any new requirements.

                  Paying for this large military machine seems to be imposing strains. Maybe it is time to look at other answers for Greek security.