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.

 

           The more I read about the economic disaster in Greece, the more I wish they would let them out of the currency straight jacket that is part of the problem.

           Greece has five main economic troubles. Its government has borrowed too much in the past, and wishes to carry on borrowing too much. The economy is declining year after year, as austerity bites with no currency depreciation or easier money to offer some relief. The balance of payments remain out of balance and difficult to finance, as Greece is not competitive with the more successful north of the Euro zone. Greece is mired in high unemployment, increasing its deficit and depressing its tax revenues. The banking system is weak. People afraid of the future are taking money out of Greece to put it into safer havens, doing more damage to activity in Greece.

           The official answer to all this is to raise taxes and cut public spending.  The aim is to cut the deficit, hoping  that the debt and deficit can be financed in the normal way. So far this has neither succeeded in cutting the deficit by an encouraging amount, nor has it impressed the bond markets. Greece remains miles off being able to finance itself in the usual way.

            The EU and IMF make heavy weather each time of lending more to Greece. The endless public arguments over how much more austerity Greece has to enforce to justify more borrowing undermines confidence more and leads to further money flight from the blighted country. An IMF programme for an indepenndent state with its own currency usually entails a devaluation  to price the country back into export markets and to cut the value of outstanding debts, and a sensible domestic money policy to allow private sector led expansion. Greece is denied both these features of a normal IMF programme by being in the Euro.

           The EU, IMF and Greece should make private decisions to move rapdily to a Greek exit from the Euro. There will be one off effects on debts, banks and the economy, followed by a real chance of econ0mic recovery. Greece needs growth. It needs more tax revenue to come in from more profit and income to tax. It needs more rich Greeks to keep their money at home or bring it back home. Only a new currency sensibly valued can  bring forward that confidence.

           Tomorrow we will look at how this could be done politcally and legally. It would be a much better option than doubling up the austerity as the economy continues to fall over the cliff. I do not accept that this would cause economic disaster. The price of Greek government bonds has already collapsed, Greek banks are already weak reflecting that and Euro area banks have already written down their positions in Greece. I do not see how Greece returns to decent growth on current policies, and growth is what it needs to give hope amongst the cuts. A devaluation, properly organised, merely acknowledges losses already recorded by investors in Greece, whilst starting the process of adjustment necessary to rebuild the economy.

 

 

 

           In the later months in opposition, when I and other economically minded Conservatives were giving advice to Shadow Ministers, we were often told that our tunes would change a year or two  into government. Wise Shadow Ministers knowingly explained to us that we might accept the  necessity of spending cuts in opposition,  but it would be very different in government. You will, they said, be demanding that we cut less and spare the spending. They expected our brave words to vanish like the melting snow.

             We are fast approaching the two year mark of the government. What is fascinating is that the position is the very opposite of that predicted by some Shadow Ministers. Many backbench Conservatives are uneasy about public spending, but for the opposite reason. There are a variety of areas where the backbenchers want it cut, where Ministers refuse to co-operate.

            Last week-end the unhappiness about taxpayers financing energy subsidies came to the fore. Most Conservatives would like the market to be allowed to operate, to provide more cheaper energy for constituents. Such a policy would spare taxpayers excessive subsidies for windfarms and the like, as well as delivering lower household and business bills. MPs think that is a double win.

             Then  there is the running sore of overseas aid. Many backbench Conservative MPs want the overseas aid budget to be targetted on the really poor and needy. Many of us are happy to be generous to those in great poverty, but do not think the fast expansion of the current budget is doing that. We pressed for China and India to be dropped from the list of aid recipients in 2010, and the money saved. The government  did not agree with us about India. This decision has now come back to bite it, with stories that the Indian government agrees with us backbenchers, and does not want the aid we send.

            Many backbenchers would dearly love to see the end of the HS2 project. Some agree with me that it should be deferred whilst we sort out the public accounts. A £33 billion project looks like an extravagance given the state of the budget, and given the running losses the new trains will make when they eventually run. It is true not a lot of money is going to be spent on its this Parliament, but every £750 million helps. It has also become a kind of symbol of how serious people are about controlling spending. Adding such a large new project before the national accounts are anywhere near stabilised looks rash.

            Then  there is the vexed issue of public sector pensions. The backbenches have been sensible about accepting that MPs pensions, like the rest of the public sector, need to be cut. They have been resolute about the threats to industrial action that have resulted from the government’s plans. The bigger worry for quite a few backbenchers is we are going through the political pain for not enough gain. MPs ask Ministers to stand firm over changes to the  higher pensions in the public sector, and were surprised by the concessions already made.

             There is the ever present question of the EU. Most Conservative backbenchers favourite spending cut would be a big cut in the EU budget and the UK contribution. Ministers have been reluctant to press this too far. Backbenchers are also worried  by the demands to put more money into the IMF. If we are short of money at home, they reason, how come we have all this largesse to give to Euroland and the EU itself? Surely austerity should begin in Brussels, not in my local Council office? As the EU is currently preaching austerity to its members, couldn’t it lead by example and show us how to do it?

                It is hard yet to find examples the other way of backbenchers wanting more spent. Partly that is because we have so far had so few cuts, but partly it tells you the mood of the party. They get it. They understand the need to curb spending after a decade when it let rip. Most of us warned and steadied our electors for the cuts. Most of us want the cuts out of the way now, as our appetite for them may well dull nearer the election.

                      It is true some MPs  are concerned about the withdrawal of children related benefits planned soon. However, the worries do not amount to a full scale demand that the policy be cancelled, merely that the government looks again at some of the anomalies which leave the person on lower pay worse off than a couple on jointly higher pay, which seems unfair. Most MPs accept this is an area for savings, but want a different approach to how they are delivered. They would like to see the couple with one parent staying at home and the other higher rate tax payer not disadvantaged compared to the two earner couple with the bigger total income.

                        Many Conservatives think the defence budget has been cut too much, but there is no move to reinstate extra spending.  All this just goes to show that the party, far from in panic at the scale of the cuts is willing the government on to save the billions that are still being borrowed.

 

         The only area of public spending which was cut overall in the first two years of this government was capital projects. The Coalition inherited large forecast cuts in capital from Labour. They abated the cuts a bit, but carried on with the main thrust of them. It has been a bone of contention ever since. The construction industry is not happy. Business lobbies generally have complained about the poor state of our infrastructure. The public sector has made enquiries of Ministers to see if the cuts can be reduced more.

      The government has responded to the pressures. It has not merely found a bit more public money for capital. It has also spoken up about the need to finance more of these items in the private sector. It is working on a scheme to promote more direct pension fund investment in UK infrastructure. It has itself put a lot of political capital into promoting high speed rail, though these plans do not entail any construction work before 2017 for HS2.

        The truth is more privately financed infrastructure would be a good idea. The UK is short of capacity in energy, water, telecommunications, airports and roads. In each of these sectors more private investment is a distinct possibility. It would both act as an economic stimulus as the capital works were undertaken, and help UK competitiveness as better supplies at cheaper prices became available. So what more does the government need to do to bring these improvements about?

Energy:  The government is deeply involved in the sector through its comprehensive regulation, its pursuit of green objectives, its role in the planning process and its overall responsibility for keeping the lights on. It needs to encourage more cheaper energy provision by granting sufficient licences for gas power stations, for oil, gas and shale gas exploration and production, and by reducing subsidies to less economic methods of electricity generation. Progress is being made with securing the construction of new electricity capacity. Changes to licences and the tax regime could foster a more active exploration and development phase for hydrocarbon.

Water  The government and the Environment Agency regulate the water industry and take overall responsibility for ensuring water comes out of the taps. They could set new targets for availability and reserves, and foster the construction of additional reservoir capacity, additional stand by desalination plant if needed, better pipe networks so less is lost in transmission, and explore whether more can be done to transport water between water basins.

Telecommunications. The government is embarked on supporting the main telecoms companeies to ensure good broadband coverage for most people, with faster line speeds and better capacity.

Airports   The government’s veto on new capacity at Heathrow is proving unpopular with business lobbies and growth promoters. Various schemes are being examined for additional runway capacity. An early and relatively quick way of expanding capacity would be to divert Northolt to civil use, whilst considering which longer term option to adopt.

Roads I will not repeat my ever popular private roads full scheme! The government could allow some private toll roads to add new capacity.