Yesterday was another day for backbench business in the Commons. This has been Mr Cameron’s best reform so far, enabling Parliament to be more relevant, and to have more impact upon the agenda and debates of the nation.

         The Committee decided to allow two issues to be aired. The first was a motion to require Ministers to make all their important announcements to the Commons first. If a Minister breaks the convention and leaks important information prior to the Statement, then the House wished the matter to be dealt with either by the Speaker or by the Standards and Privileges Committee. Parliament voted this motino down by 228 votes to 119.

          In recent years governments have got lax about telling the Commons first. They often prefer to tell a friendly journalist or create a story on a week-end show. This matters. Parliament is the correct forum, so the matter can be properly exposed to comment and criticism by Opposition and government backbenches alike. If Parliament is to stay relevant most of the time it needs to hear the news first, to disseminate the main announcements about government policy and actions.

          The second motion was to call upon the government to reform our extradition arrangements. Many of us think the European Arrest Warrant  is too intrusive in its impact on UK justice. We are not against extradition, but would like to see the UK retain more control over the process. Similarly, many of us thought the last government’s deal with the US was lop sided, giving too much to the US. Other countries have different arrangements which we think are preferable.

            This motion passed without opposition. This means the government has accepted it. Let us hope they now carry out the will of the House. The UK needs a better deal on extradition. Too much power has been given away by past Parliaments. It is good to see this one trying to reclaim some. I am grateful to Dominic Raab for bringing forward his motion, which I did co-sign.

I read that the government does not think the current Euro crisis is the best time to renegotiate the UK’s relationship with the EU. Sometimes we are told there is no urgent need for a new Treaty, so there is no opportunity to renegotiate. Sometimes I read there will be changes to the Treaty, but it is not right for the UK to make demands, when these changes will apply to Euro area members, not to us. We are told we should not stand in their way as they try to patch their troubled money.

I disagree. It is the German and French intention to press the Euro states into a much closer union. There will be budget controls, much more intensive surveillance of spending and taxing, more rules and regulations. The 17 will meet more often. They may develop a passion for settling things between themselves, and then pushing them through the 27 member EU where necessary. They will be able to outvote the UK and her few allies.

They may do this through Treaty changes. They might do it through a new agreement of the 17. They might simply try to do it without changing the formal powers of the Treaty, as they are in a hurry and have a phobia about referenda which some countries would need for a new Treaty or Agreement.

This requires a new relationship for the UK. We cannot be at meetings of the 17. Our interests in an open market throughout the EU are different and much more limited than their plans for common government. The UK needs guarantees or opt out facilities to protect herself from adverse law making and decisions taken by the 17 alone, or taken by the 27 on the insistence of the 17 against our wishes.

The official line is to keep more things in the 27, for fear of our exclusion from any new grouping of the 17. I would find a new organisation for the 17 liberating. We would not have to follow its rules as we would not belong. We could then at leisure negotiate about what was left for the 27 to do. The government seems to think an agreement by the 17 is a threat to us, one to be avoided at all costs. I do not think they could easily do it. It would take time to establish the new architecture and legal framework. It would presumably need referenda decisions in several Euroland countries. From the UK perspective it would leave no doubt that the costs, duties and laws surrounding the Euro are for the 17 alone, and not for us. We would need to negotiate what we can by way of protection from abuse of the law making of the 27, but we have to do that anyway in the context of a stronger Euro group within the 27.

I still think negotiate and then vote is the right UK approach. To those who say this is not the right time, I ask “If not now, when?”
To those who fear a Treaty of the 17 I say “Bring it on”. It will makes things much clearer and will highlight the need for the UK to sort out its position vis a vis the budget, taxing and law making powers of the EU.
And to those who say just withdraw, who claim the EU will not negotiate, I say let the people decide. If the EU will not give a better deal more people will vote to come out altogether.

PS: I see the English Democrats claiming a great success in coming second in a Rochford by election. They took half the Lib Dems vote. Was UKIP asleep for this one, or are the English Democrats taking over in second place elsewhere?

Many western countries have been living well beyond their means for several years. The US and the UK have been spending 10% of National Income more than they earn on public spending. Most now agree we cannot carry on like this.

The substantial overspend in the public sector follows hard on the heels of a large overspend in the private sector. The public sector is now borrowing very large additional sums to keep its spending going. In the years before the Credit Crunch many citizens in the US and UK (and in Spain, Ireland and the rest) borrowed large sums of money to buy assets or to consume more. Property prices were driven higher by excessive mortgage finance. The Credit Crunch has changed this. Property prices have fallen. New mortgage finance is difficult to obtain. Overall individuals are reining back their excess spending, and taking or nursing losses on assets.

There are three main ways in which the public sector deficits can be reined in. The favourite political way is to pursue faster growth. If the economy can increase more rapidly, more money will be paid in tax. If the growth rate of public spending is slower than the growth rate of the economy, the deficit will be brought down. Unfortunately in the Euro zone the most heavily indebted countries seem unable to grow. In the UK and US there is a bit more growth, but the rate is not fast enough to resolve the deficit problems.

The second way is to increase tax revenue. The politically popular route to curb the deficit if growth does not suffice, is to tax the rich more. Most politicians unite in agreeing to this proposal. It has two drawbacks. There are not enough super rich to pay all the extra bills. If you raise rates of tax too much on the rich, they may leave, or employ better lawyers and accountants to find a way round the rules. In the UK Mr Blair and Mr Brown, for most their tenure, thought 40% Income Tax and 18% Capital Gains Tax were the optimising rates to get most revenue out of the rich. The Coalition, accepting Labour’s last minute rise to 50% for incomes, and imposing its own 28% for CGT, may discover to its cost these rates lose the Exchequer money. There are limits to how much tax you can get out of a free society with open borders. No recent UK government has managed to collect more than 38% of GDP in tax, so there remains a very large gap between revenue and spending.

Governments following the higher tax route are thrown back on taxing most people, not just the rich. The UK Coalition has imposed higher VAT and National Insurance, as well as the higher Income Tax rate and various other increased taxes and fees. Petrol tax has gone up. This in turn has depressed real incomes, meaning less demand in the private sector. The top 10% of income earners pay £30,000 a year each on average, net of benefits and tax credits. The lowest 40% of income earners are net recipients, with benefits and tax credits exceeding all the tax they pay. These figures include VAT and indirect tax.

The third way is to cut public spending. So far the UK government has not tried this overall, though it has made various cuts in individual areas and departments. This is being tried to a greater extent in Euroland, but so far it is proving difficult there as well to curb total spending. Greece wont cut its very large army. Spain finds high and rising unemployment keeps adding to the welfare bills.

The paradox is many UK people complain of the cuts. They mean by this the cuts in their own living standards. The BBC yesterday morning provided a vox pop piece looking at various individual budgets and the way they were being cut. The commentator did not point out that much of the squeeze on these individuals came from higher taxes to pay for the growing public expenditure. People complained of fuel bills (largely tax), energy costs (regulatory and tax costs), higher shop prices and other areas where higher VAT plays its part.

We all dislike cuts in our living standards. Some depend on benefits and government services for an important part of their living standard. Most rely on income from work and savings. It is this majority group that also complains of cuts. The irony is, these cuts result directly from the need to pay for higher public spending out of increased taxation. The ultra low interest rates add to the pain for the prudent, slashing their savings incomes.

We were told it was weeks to save the Euro. That came and went. Now we have apparently another few days. Mrs Merkel seems to think there is plenty of time to sort out the problems of governance, transfer payments, and control of taxes and spending. Mr Sarkozy seems to be in more of a hurry, partly because he faces an earlier election.

I think there is still a chance that Germany will partially relent on bond buying and money printing by the ECB to buy them more time. There is also a chance that the markets will force break-up, moving faster than the pace of integration and problem solving within the zone. I put it around 50/50. It’s all in Mrs Merkel’s mind. It’s the race to change German public opinion about printing and borrowing together versus the speed of the market imperatives.

Today I invite you, the readers, to tell the world what you think the Euro’s chances of survival are. Do you think they will print and spend enough to buy them time? Do you think more austerity in Greece and Portugal, Spain and Italy, on German recommendation, can pull them through? Or do you think the relentless pressure of the bond markets will force countries out of the currency?

The tired old Foreign Office and Lib Dem line is we have to go along with what the EU wants for the trade. It bedevils the debate again about whether we can negotiate a better relationship for ourselves, or whether the UK would be better off out. We constantly hear the refrain that we have to pay the subscription to be in the trade club, you have to take some rough with the smooth, we have 3.5 million jobs dependent on EU trade.

It means we have to repeat the counter sound bites time and again.

The EU sells a lot more to us than we sell to them. They would not wish to risk that.

Whatever we do on renegotiation and membership, Germany will want to sell us her BMWs and France her wine.

If the rest of the EU did get protectionist with us, we could take them to the WTO and demand international action. Or we could propose a supertax on imported wine and imported cars here in the UK in retaliation.

They say we need to be fully in the EU to influence the rules that affect our business. The question is how much influence can we have, when we seem unable to resist a torrent of new rules which we neither asked for nor need. It feels like we take the rough with the rough, and end up worse off.

The advocates of staying in on current terms have to answer this increasingly difficult question – isn’t the single market becoming a means of lumbering us with uncompetitive costs and rules which Chinese or US or other non EU companies do not face when selling into the EU market?

If the EU moves towards more political and economic integration for the core countries, the UK will have to demand a different arrangement for us to justify our consent to the new Treaty.

If Euroland instead tries a new Treaty for just 17, they will discover all sorts of legal complexities between the 17 and the 27. It will pose all soerts of problems over use of staff, facilities, and payment of bills. We will still need a different relationship, so we still need to sit down and negotiate one either way.

The UK needs to be making this clear, now Euro integration or break up is on the agenda.

Yesterday we discovered that 192 banks are using facilities from the European Central Bank. More and more of the business that used to go through the inter-bank market now goes through the Central bank of the system. Commercial banks do not trust each other enough to lend and borrow between themselves on a big enough scale for their needs. The weekly liquidity supplied by the ECB to banks rose to Euro 265 billion.

We also were told that the bond buying programme of the ECB has now bought more than Euro 200 billion of bonds, largely sovereign debt in the weaker countries. This is meant to be bought by the ECB on the basis that it mops up the equivalent of the cash it makes available for the purchases. It should avoid printing money overall to carry out the bond buying. This week there was a modest shortfall in the amount of money deposited with the ECB to cover the bond purchases in full.

The purpose of bond buying is to try to get the prices up of the weaker country bonds, thereby lowering the borrowing costs to those countries. The aim is not meant to be printing more money to buy the bonds to make more cash available, which is why they sterilize or get the money back from the bond purchases by other means from the markets.Typically banks in the system deposit with the ECB, or lend the ECB the money.

Commentators yesterday were debating whether this marks a change of policy. Is the ECB moving towards printing money to buy bonds? There is no statement to say so, no change announced on their website. It is more likely it was difficult getting in the money needed because bank liquidity was very strained.

To underwrite this possible explanation, there was a concerted move by major Central Banks together to supply more liquidity to banks and markets later in the day. This gave a sugar rush to risky markets, with shares and commodities leaping up on the news. If the market problem is just one of liquidity it is something concerted Central Bank action can resolve.

However, the deeper seated problems remain. There is a lack of competitiveness of the south of the EU. There is a problem transferring German surplus to weaker deficit countries on trade account. There is the weak position of some banks, recently recognised by more rating downgrades. There is the vicious circle between bond prices and bank balance sheets. The Euroland politicians have to do more than just enjoy the temporary benefits of more Central Bank cash.

           For the last eighteen months I have explained how the government’s strategy has been  based around a private sector squeeze – more taxes and higher public sector fees and charges – and continued real expansion of   public sector spending. Most people write about big cuts to the public sector, without accepting the overall position is as I have described.

            Today I can point them to the official figures in yesterday’s OBR book. On page 28 Table shows that government consumption increased real GDP by 0.5%, whilst private consumption decreased real GDP by the same amount. In other words, in the year to June 2011, people were taxed more to pay for a further real increase in public spending.

           The UK has no need to fear Germany. The UK has no need to be impolite to Germany. The UK should resist the temptation to lecture Germany on how to lead the Euro zone.

             There are unwelcome signs that the UK/EU relationship is becoming strained. The Coalition  government seems nervous about the impact of faltering economies on the continent, and concerned about recent policy moves. Germany and the EU seem annoyed at the UK government’s “grandstanding ” from outside the Euro, and insistence it should be in the room. The UK wants to play but does not want to pay.

            It is easy for the UK to correct its part in the faltering relationship. UK Ministers could and should answer all enquiries on the state of the Euro, Euro bond markets and the like with the tedious but safe formula “We have no wish to provide a  running commentary on the Euro”. They should not wish to undermine it. Nor should they be in the business of trying to buttress it. They should avoid comments that disagree with Germany on it, and comments which avoid disagreeing with France. As France and Germany disagree, that means keeping quiet.

               What the UK government needs to do is to articulate strongly and clearly the UK’s wishes. This has to be in the  form of a flexible  approach depending on how the Euro area evolves. It is safe to assume that any fix for the zone entails much more detailed centralised control by the EU over Euro member states. No UK government could join it. We need to explain that we require a different relationship with the increasingly integrated zone.

                         The immediate threats to the UK are fourfold. The first is the attempt to establish extra territorial jurisidiction over UK financial markets, to exclude us from Euro business. This needs forceful rejection by political and legal means. The second is the rapid push to complete regulatory control of all financial activities in London by the EU. This too needs firm rejection by legal and political means.  The third is the impact of EU energy measures on UK energy prices, which is becoming a major obstacle to retaining and growing industrial activity in the UK.  Now the UK Chancellor has identified the issue, the government needs to take a remedy to Brussels for discussion. The fourth is the general burden of cost and complexity pushed onto the UK by the EU budget and regulations. The UK needs to seek powers and money back.

                    Just getting a vague promise of movement on Working Time is no longer sufficient. UK growth and prospects now depend on moving some of the roadblocks to growth imposed by Brussels. The UK government has to say it needs a renegotiation and it needs it now. It will put the results to the people in a referendum. That should get Germany’s attention. It is then up to them whether the UK votes on a package the people  are likely to accept, or on the current deal. Polling shows 80% of the British people do not think the current deal is satisfactory.

           The OBR as expected has revised its forecasts down considerably.  13 % growth has been reduced to 8.4% over the period 2010-2015, compared to my forecast of 7.5%. I fear they are still on the optimistic side for the last two years of the strategy, but the differences are not now so large.

            The OBR says that total borrowing 2010-2015 will now be £563 billion, compared to their forecast of £451 billion in June 2010 and £485 billion in March 2011. They are now a little higher than my forecast of up to £550 billion, with a central figure of £520 billion. I apologise for not being pessimistic enough.  It reminds us that they see a strong relationship between growth in output and growth in tax revenues.

           Spending remains on the same overall total. The extra deficit arises from a sharp downwards revision to their forecast of increased tax revenues. Readers will remember I always queried the likelihood of an extra £172 billion of tax revenue for Year 5 compared with the last Labour year.

           There is a small shift from current to capital spending within the same increases in total spending.  Over the five years capital spending will increase by a total of  £5.8 billion. Current spending will be £1.1 billion less than the old plans in 2014-15.  Total spending rises from £669.7bn in 2009-10 to £736.4 billion by 2014-15, an increase of 10% in cash terms.

          Today we are told the OBR will produce far worse forecast figures for growth and borrowing.  That will come as no surprise to readers of this blog. I have argued for the last four years, from the Economic Policy Review onwards, that the trend rate of growth of the UK is now around 1.5%, not the 2.35% official forecasts assume. I am sticking with my forecast of 7.5% growth for this Parliament. Expect OBR to come down closer to this from their 13% plus forecast.

           That’s why I have assumed £520 billion of extra borrowing this Parliament, compared to the £451 billion June 2010 official forecast, and the £485 bn revised forecast in March 2011.  What today will confirm is that the official  June 2010 forecast, their Autumn 2010 forecast and their March 2011 forecast were all wrong, by their own admission. Today’s is likely to be closer to the truth because it will be more pessimistic.

             The problem that poses for the government relates to the structural deficit. The government has promised to eliminate this. It has said it will not eliminate the cyclical deficit, the bit that rises and falls according to growth, unless and until there is enough growth. If the OBR now thinks the trend growth, the reliable growth over a period of years, is lower, the structural deficit must be higher. They will probably say less of the borrowing each year will automatically disappear as the economy picks up. That makes the task tougher.

           I doubt there will be many interviewers asking why the OBR got it so wrong for so long. If some of us without their  resources for forecasting could see the post credit crunch world with a looming Euro crisis would mean  slower growth,  why couldn’t they with all their money and advantages?