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.

            The public sector, as we have seen, likes to assume that all last year’s current  public spending is a given and should be repeated next year. If you want something extra, as the public sector always does, when budgets are tight, you therefore have to cut something.

            Council officials live in hope that their Councillors will raise taxes or car park charges or successfully lobby for higher government grants. So they pile on the nice to haves and the unavoidables extras in their budget papers. Councillors are often forced to say in return that they cannot find all the extra money “required”, and ask for some cuts instead. The game playing officers will then often choose the most politically damaging or the least popular cuts to try to persuade the Councillors that they should look again at getting more money in from some source or other.

               The same thing happens in some government departments. Officials reluctantly put forward cuts when they just want their Minister to go off and have a battle royal with the Treasury for more money. Why not, they reason, put forward a clumsy cut. The Minister may spot it and come to see he needs more money to avoid it. If he doesn’t, he may lose the cut in the execution. This may  force the government to spend  more money after a bruising encounter with Parliament and the media. Either way the department “wins”. It requires a strong and confident Minister to reject the budget paper, and say it is based on false choices.

            I never recall as a Councillor or as a Minister receiving a budget  paper which recommended cutting the administrative overhead unless I had insisted on it. I was never voluntarily offered big savings on paper, pens, administrative staff, pensions, early retirements, absentee rates, volume of reports, postage, staff travel , conferences and all the rest. On the contrary. I remember letters sent out in government urging Ministers to do more overseas trips and conferences. Some of those were good, but they were always popular with the officials. They wanted to make sure their department kept up its totals and spent a full budget.

       In a competitive private sector company there is constant review of overheads. Management is always challenging itself to do more for less, or to do it better as well as cheaper. There is a common interest in buying better, in simplifying systems, in using talent better. In government there is often a common interest in maximising spend for no good reason other than that is what government does. Some politicians even send out claims that service X is better than service Y because more is spent on it, with no attempt to question how well the money is spent or what the users of the service think of its delivery.

       When I walked into one Ministry to take over as the Minister in a previous government, one of the first questions I was asked by my officials was what additional magazines I wanted to see. There on a large side table were set out an impressive range of glossy publications. They must have reflected the interests and passions of previous Ministers. It was a cameo of how the government traditionally does business.

        The question was what extra ones did I want? No-one mentioned the budget for newspapers and periodicals. No-one suggested I might like to cut out ones that previous Ministers valued but I did not. The public sector proceeds by base budgets plus growth. It accepts that all previous magazines ordered for good or bad reason need to be taken permanently thereafter. Any Minister who queries the base is upsetting the applecart, giving ground to the Treasury, taking money away from the Department. It assumes it is good to add some more. It seeks to take the decision without informing the decison taker of the relevant financial information.

              As a businessman joining government I just saw a cost. I wanted to know how much the bill was. As a politician I saw a potential bad story. Say a journalist found out  the names of the publications the Department was buying for the Ministerial office? Wouldn’t they unkindly have suggested some were a little off the mainstream of the Department’s duties? I pruned  the magazine budget. I looked at the budget for the department as a whole, not just for the Ministerial office. I asked them to review  how many copies of needed periodicals the whole Department required. If I had a personal interest and wanted a magazine about it, I had a salary and could buy it from that. It was a small drop in a large ocean, but it was meant to illustrate a more business like way of approaching spending.

              Too many proponents of more public spending are like children in a sweet shop with a rich and friendly uncle. He takes care of the bills. There is no need to ask how much each item costs. The child is spared the bitter sweet task of having to weigh up the delights of each sweet against the dent it makes in the pocket money. Public spending to some in government  is not about choices, and seeking value. It is about finding the rich uncle, and then just ordering what you think you will like, even at the risk of too many sweets making you sick. The big difference of course is when the state finds the rich uncle it does not presume on his voluntary generosity, but threatens him with prison if he does not pay up. This can make a lot of rich uncles go missing, or hide offshore. It has even been known that  leading proponents of more state spending  find ingenious ways of avoiding tax for themselves.

               Any government or Council that wants to cut spending without damaging services has to change this approach to buying and budgets. The base budget has to be reviewed at least annually, as well as the incremental items that officials and lobby groups say need to be added. The Treasury’s public spending division should constantly be challenging the cost and delivery of all programmes, as well as the need for the more marginal ones at all.

I find myself in agreement with some of the Greek left wing parties. I think cutting the minimum wage in Greece by 22% is wrong. It is too far too fast when the Greek economy has stalled for lack of demand. There are other easier cuts in spending that they might make, but only if they also take some positive action to stimulate the economy. That means getting out of the Euro.

I think it wrong that the EU tells Greek politicians what budget they should set. It removes the last vestiges of proper democratic accountability in Greece. The surprise is not that it triggered six resignations by Ministers,  but that it did not trigger the resignations of most of the rest. However, it all makes perfect sense if they are to remain locked into a single currency where other countries have to pay a lot of their bills. They need to resolve the issue of Who governs? They need to persuade all the voters in Euroland of a new political architecture which shifts decision making to the centre if they are to have any chance of getting the politics to reinforce the bureaucratic imperatives of a shared money.

There is a passive sullen response from much of the Greek establishment. They follow EU and IMF orders because they are told they have to. They are totally dependent on the next loan or hand out, so they feel they have to accept what they are told. Unfortunately for them too much of the “assistance” comes in the form of loans, and not enough in the form of grants. This leads to bigger debt problems. The Greek establishment then retaliates in the only way left to it, demanding a larger “hair cut” on the debt.

There is a fundamantal dishonesty in all this. If all concerned want the Euro to stick together they have to pay more for Greece. Surely it is more orderly and seemly to pay more up front, instead of pretending to lend them money and then conniving at default on the debt at a later date?

The Germans know from bitter experience just how dear it is to pay for a single currency in a state which struggles to keep up with the rest of the zone. They found they had to put billions into East Germany when they went for a premature currency union in 1990. They did not do that by “lending” money to East Germany. They just paid up. They do not want to do the same for Greece, because they do not have public consent to do so. Yet all the time Greece stays in this union, there are liabilities building up for German taxpayers. They may end up being paid by default rather than by voluntary grant, but it will come to the same thing.

           For the third winter in a row we have lots of weather, instead of the warmer climate forecast by many. Last week when I got up early to see how the roads were being treated, it was minus 8 degrees in what by now should be   mild Berkshire. Yesterday morning I woke to another covering of snow concealing the ice and compact snow  beneath.

          Given our vulnerability to weather even in an era of global warming, energy prices matter a lot to us as we have to turn up the heating and huddle indoors to keep warm. We also need to recognise just how big a cost energy is to anyone in manufacturing business. As the UK government wishes to have an industry led economic recovery, it needs to pay attention to this large bill.

           In order to write this piece I researched relative UK energy costs from the copious official figures put out by the UK government. Their Digest of UK Energy Statistics may not become a best seller, but it is a very professional compendium of price and volume information about our energy use, with international comparisons. 

          The comparisons are  also very revealing. They compare our energy prices with the USA and Canada, and with every European country in great detail, but fail to include our  big industrial competitors and suppliers  in China, India and Brazil. It just shows how Euro centric the establishment remains, and how inward looking Europe is, at a time when the exciting  industrial and economic action is happening a couple of continents away.

           The comparative picture is far from rosy. If we start with diesel, the lifeblood of transport, the UK diesel pump price after tax is the highest of EU 27, and far higher than the USA and Canada. Interestingly, the pretax price is the fifth cheapest in the EU, so the private sector is performing quite well, only to see very high taxes turn it negative. Unleaded petrol is the fourth cheapest in the EU pre tax, but is also the dearest  post tax.

           When it comes to electricity for industry, the UK at 8p per KW hour is in the pack of EU countries, but double the level paid by US businesses.  Gas is relatively cheap in the UK by EU standards, but the industrial charge of 1.7p per KW hour is  still 40% higher than the US charge of 1.2p. The Climate change levy imposes an extra 1-6% on gas bills, and an extra 2-5% on electricity bills here. If we were allowed to see the Chinese figures, they would also reveal how uncompetitive we are in this area.

            When the UK government was setting the carbon price for its policies I was consulted. My advice was to set a carbon price of zero until the rest of the world caught up with this way of doing business. High energy prices here do not stop the fuel being burned, they just divert the burning to cheaper countries who are not imposing these levies, taking industrial activity and jobs away from us. The Treasury, I read, did try to get the price down in its arguments with Mr Huhne. It is now working with the Business department on offsets or subsidies to the energy price for large process industry, understanding  that all we can really do here in the Uk with our energy prices is decide how much is burned here by industry, rather than helping control the world’s burn.

                The UK has a great advantage in the energy field. We have large new resources of shale gas available, some untapped conventional gas and oil resources, plenty of coal, and the possibility of more hydro and nuclear. I am all in favour of strict control over pollution, and encouragement of maximum energy efficiency. I am also very conscious that we are now paying a price for very dear energy. People on low incomes are suffering in their homes. More industry is going elsewhere to burn its fuel. The government needs to accelerate its programme for new energy sources, and to keep in mind the need to get prices back into a competitive range. While they are doing it, could they start looking at how far adrift we are from our true competitors in Asia and Latin America, as the EU slips beneath the gathering storm waves of the Euro.

          Yesterday Anatole Kaletsky argued that the US has enjoyed a better recovery over the last two years than the UK because the US pressed on with large deficit financed spending plans whilst the UK went in for austerity and cuts.

           I thought Mr Kaletsky, a respected commentator, would trouble to read the figures coming out of  London and Washington before making his statement. Let me share with him some of the latest official statements from the two sides of the Atlantic about GDP growth and public spending:

            The last quarter figures for GDP in London did indeed show a small fall in the fourth quarter. They also included the following statements: “the UK Q4 seasonally adjusted index of government and other services increased by 0.4% compared to 0.6% in the previous quarter. ….Q4 2011 was 2.5% higher than Q4 2010.”

           Meanwhile, the fourth quarter 2011 US figures which showed better GDP growth contained the following: “Real federal government consumption expenditures and gross investment decreased 7.3% in Q4….Real state and local government consumption expenditures and gross investment decreased 2.6%”.

             So Mr Kaletsky is right that the US grew faster, but completely wrong on the trends of public spending. The US grew faster despite- or because- public spending was being cut hard, whilst the UK failed to grow despite or because the public sector spending was continuing upwards in cash terms at a time of little public sector wage growth.

                 Where Mr Kaletsky was nearer the mark was in comparing UK and US tax policies. The end of last year in the US saw more of a surge in activity because some favourable tax breaks remained in place for those months, whilst the UK was paying the full increases  from the higher rates of Income Tax, CGT and VAT imposed by the outgoing and the incoming administration.

                  The divergence in growth between the US and the UK to me is based on two major differences. The first is US banks have recovered more than RBS or HBOS and can finance more of a recovery. The second is the tax regime is more benign, helped by tax breaks that should expire this year pulling forward new activity and investment. I will avoid being provocative by suggesting that the deeper cuts in US public spending are also part  cause of superior performance. Anyone who has been to the US over the last year will have heard of the political and  trade union struggles over spending cuts at the local and state level.  

                   As I have repeatedly argued, the UK recovery is meant to be based on a public sector squeeze and a private sector expansion, to rebalance the eocnomy. In the first year and a half of the plan tax increases, energy price rises  and broken banks impaired the private sector recovery, whilst public spending continued to rise. It is interesting that the high and rising levels of public spending and the sustained high levels of public borrowing did not trigger better growth as some suggest they should.

               Yesterday Parliament debated the  local government settlement for next year. Most of the discussion was about cuts.  Labour argued that the amount of Exchequer finance for local government was not enough, but declined to suggest how much more should be awarded or where the money might come from.

          No-one seemed interested in debating the numbers. Indeed, few MPs wanted to debate it at all. I pointed out that the government proposes £72,000,000,000 of taxpayer support for local government next year, about the same amount as they gave this year. That is around £1200 for every man, woman and child in the UK. It is around £1400 for every man woman and child in England, as these spending figures were just for England.

                The support for schools was up, as promised. There was a substantial increase in grants for environmental and housing purposes. Not even the Minister wanted to talk about the increases, as everyone was well versed in the real cuts analysis which dominates discussion of these matters.

                 I thought it was a disappointing day for the Commons. Surely the spending of £72,000,000,000 is an important issue? Surely more MPs have something to contribute to how this money should be spent, and  what Councils do with it? Surely more could identify areas of Council spending that we could do wtihout, or we could do more effectively? There were a few genuflections to spending better, but no examples, exhortations or requirements to do so.  I would be interested to hear from readers about whether you think the central government is spending too much or too little on local government, from your observations of local spending patterns.

                          Maybe MPs were nursing their own pay cut. Yersterday was also the day when IPSA announced that next year would see no pay rise, coupled with a 1.85% increase in pension contributions for MPs.  This will take the MP’s contribution rate to 13.75%. I know this will warm some of you, though doubtless you feel it should go up by more.

             There is no exit in the Consolidated Treaties for countries needing to leave the Euro. There is no provision for a country to organise its own departure, and no provision for a vote of the other members to expel a member state. As the existing members in the Euro wish to remain members, that would seem to be an end to the discussion.

            However, the Consolidated  Treaties do require Euro members to conform to the convergence criteria and obligations of membership. These include tough targets for debts and deficits which many states do not meet. Those states that are far away from meeting these requirements are the most vulnerable to politcal and legal pressures from within the Union.

             In practice, when a member state is no longer able to borrow the money it needs to finance itself in the markets, it is forced into a political negotiation with the rest of the Euro area. Such a member state seeks loans from the Euro area and from the IMF. This triggers a thorough review of that member state’s economic policies, and results in both the rest of the Euro area and the IMF imposing conditions on the state in return for loans. It is at this point that the question of continued membership of the Euro should be placed on the agenda.

                The Euro states, the IMF and the troubled state should explore in their private discussions and briefings whether exit from the Euro would assist the recovery programme, and help the remaining states within the zone. If the troubled state was persuaded, the rest of the Euro area should then facilitate its temporary exit from the Euro. If the other member  states were decided that exit would be best, they could make that a condition for their loans, whatever the view of the troubled state.

                           Legally it would be best to implement a decision for a state to leave by transferring that member state to Article 139 status of an EU country with a derogation from joining the Euro. This would make the exit state technically a candidate state for membership, but would also require that state to demonstrate convergence of interest rates, inflation rates and exchange rate with the rest of the zone, and to show it can get its debt down to 60% of GDP and its annual deficit to less than 3%. These requirements would reinforce the discipline of the EU/IMF loans, but would also mean there would be no early re-entry for a troubled state, given the huge divergence of their debt, deficit and interest rates from the requirements.

                   The advantage of doing it all this way is that it should avoid legal challenge. No amendment to the Treaties would be needed. The exit state would move to a status that works for non Euro members of the EU.  The exit would result from the decision of a member state to seek loans and aid, once that state had decided it could no longer finance itself inside the Euro. That is the right time to ask whether it would  be better for that country to leave the currency. It would enable the IMF to put in a normal IMF recovery programme, with troubled state domestic monetary and currency control to assist the process. If at a later date the exit state wished to assert its wish to remain with its own currency in future, consideration could be given to allowing that state a permanent opt out like the UK.