I will be giving a lecture in the Old Library at All Souls College, High Street Oxford at 4pm on Friday 25th November.

 

          The Navy is a paragon of virtue compared to the army.  Now that there are just 31 warships  (destroyers and frigates and submarines), there is a mere one Rear Admiral per ship. Most of the ships are commanded at sea by Commanders or lower ranked officers. Very few Captains go to sea in command of a ship. We do still have 300 captains, however, to sail desks  and fire up  bureaucracies.  That’s almost ten captains per warship.  There are just two full Admirals  and  7 Vice Admirals.

         The Senior service is better equipped with Commodores, in case squadrons need to put to sea. There are  80 of those, or almost three per warship. It still gives  a lesson to the army in making do with fewer top ranks.

 

          Amidst all the spending increases of the last two years, the MOD has been the subject of cuts. We have been told these are deep and damaging. We have learned that we will have fewer tanks, ships and other military equipment. We read of redundancies for troops.

       I decided to ask a few questions to see how they were getting on. Let’s begin today with the army. This is being reduced to fewer than 100,000 personnel in uniform. I asked how many Majors were needed to command the units of such an army, expecting to hear it was around 800, with each Major commanding about 120 people. I was told the army currently has  4700 Majors, or  six times what you might expect.

       A Lieutenant Colonel typically commands a battalion of 650 people.  You would expect 150 of them in our slimmed down forces. Instead I was told we currently employ  1780, or 12 times the number you might expect. Indeed, you could form three battalions just of Lieutenant Colonels.

         An army does need some senior staff officers. You might have thought we needed around 15, given the number of brigades. Instead, I discover we employ 580 Colonels, or 38  times what one might expect.

            We are a bit shorter of Generals. There are 6 full General officers, 9 Lieutenant Generals , 43 Major Generals and 170 Brigadiers. If a brigade is around 2000 people, you might expect 50 Brigadiers. There is one senior officer for each battle tank, and around 8  Lieutenant Colonels for each tank.

           So we have a pay bill of over £400 million for top management in the army, with a diminishing number of people to command. Is this cut to the bone?

 

              The UK enjoys six months chairing the European Council which supervises the Human Rights Court and Convention.

              The UK is seeking amendment to the current system, to try to return it to the original intentions when it was set up after the Second World War.

              The idea was the member states which signed the Convention  would police it to ensure no signatory state violated crucial principles like the right to a fair trial and the need for a state to refrain from torture.

               In more recent years the ECHR has accepted a wide range of cases against member states from individual litigants seeking to change policy or push the boundaries of law in their respective countries. The UK thinks these cases should be settled under national law in national coruts, without an appeal against the domestic legal system to the European level. If, for example, the UK Parliament does not wish prisoners  to have the vote, there should be no right for the ECHR to overturn that judgement. Nor should the Court be able to decide individual migration cases against the determination of UK courts under UK law.

                The UK’s aim is to disallow individual appeals. The UK would remain a signatory of the Convention, subject to the judgement  and disapproval of the other member states should any future UK government violate the major principles of justice included in the Convention.

                This was an idea proposed in the “Future of Conservatism ” book recently published, in a chapter written by Geoffrey Cox QC MP.

        I have found there are are least 87 examples of countries leaving currency unions and establishing their own money  since 1945. In most cases establishing an independent currency allowed the country concerned to set more sensible interest  rates and exchange rate to help them grow. In every case it gave them more independence, strengthening their ability to make their own decisions free of foreign interference.

       The Euro remains under pressure.  Many in the markets and in the weaker countries are waiting for Mrs Merkel to relent. They just want her to say the ECB can buy up many more EU country bonds, and print the money to do so. She so far resolutely  refuses to do this. The Governor of the Bank of England this week in his press conference explained her reasons very well. He pointed out that a Central Bank has a role as the lender of last resort. That means it acts as  the lender who supplies cash to commercial banks in its jurisdiction if they are solvent but in need of temporary loans. They are lent money at a penalty rate to see them through. It is not the job of a Central Bank to act as lender of last resort to countries that have run out of credit and whose solvency is in doubt.
 
          Saving the Euro is ultimately a political decision for the leading countries in it. Saving it means finding a way of relieving pressure on the bond markets for the weaker countries. That in turn means the richer countries being prepared to send money to the poorer parts as transfer payments and grants. Alternatively the richer countries need to agree to use their more favourable credit rating to borrow and lend the money on to the weaker countries at subsidised rates. This in reality means the richer countries paying some of the bill for the poorer countries. German public opinion does not favour doing this, hence Mrs Merkel’s reluctance. Maybe one day she will, but so far there is no sign of it. She still thinks it can all be done by cutting spending and raising taxes, but so far this has not worked.
 
          The alternative to big transfers of money and subsidies around the union is the break up of the Euro area. The leading participants have allowed their own speculation about letting Greece out of the zone slip into the public press. There is still a feeling by many inside the governments, and by many of their faithful followers in the press, that the break up would be a financial disaster. It would perhaps be wise of them to read a little more of the history of the break up of previous currency unions. There have been plenty of examples.
 
          Within Western Europe the latin currency union led by France and the Scandinavian currency union both broke up without great calamity at the time of the First World War. Between  1945 and 2007 according to the Monetary Authority of Singapore  69 countries have left currency unions. This figure leaves out a good number, including the  break up of the rouble currency in the early 1990s. It also excludes the split of Czech and Slovak currencies in 1993. It includes the ones which  left the sterling area, like  New Zealand in 1967 and Ireland in 1979. It happened by agreement with a relatively smooth transition. Some like Bangladesh left the Indian union. Others left former colonial unions: Mozambique for example left the Portuguese area in 1977 and Algeria left the French franc area in 1969.  Again these changes caused so little disruption that most have forgotten they ever happened.
 
            It was with more sense of turmoil and crisis that the rouble area broke up in the period 1992-5. 16 members of the rouble union broke away forming their own new currencies. This includes Russia that established a new differently valued  rouble for herself.  Latvia, for example, did it in two stages. First she created a Latvian rouble, which started at a one to one exchange with the old common rouble. Then she launched a new currency, the lat, to replace the Latvian rouble. It worked and allowed her economy to develop well for the ensuing few years.
 
            The uncertainty about the end game for the Euro continues to damage markets. The battering of the bonds does make things far worse. It means banks will lose yet more money on what were meant to be safe holdings. This in turn means they will lend less, slowing growth still further. If the bond markets force more countries into default like Greece it makes recovery more difficult. Attempting to prevent his by offering large loan bail out packages for the bigger countries at risk is going to strain political and financial tolerances within the union. Mrs Merkel holds the fate of the Euro in her hands. Either she has to sanction large amounts of financial support to the poorer areas, or she has to organise an orderly restructuring of the membership of the zone. The good news is that if she with France  did finally decide to change the membership, history shows it can be done and it need not be too disruptive. It is surprisingly common for countries to leave common currencies.
 
     

 

            The UK’s foreign policy objectives are currently very muddled.  The UK wants the Euro area to adopt bond buying and quantitative easing. This would delay but not prevent the ultimate crash of the Euro. It would mean bigger debts and more unemployment by the time  Greece and other weaker members are finally driven out, or Germany decides to leave as it is all too costly. It is difficult to believe the southern states can become competitive within the zone, or that Germany will be prepared to pay all the bills to keep it going.

              The UK wishes the Eurozone to integrate more rapidly, adding political union to monetary union. This would create a strong new country on the continent, something previous generations have fought against. The UK wishes to have a “seat at the top table” despite not wishing to be part of this new political union. It is difficult to see how this could  work.  The UK does not wish to make further financial contributions directly to the poorer areas in the EU, but will do so indirectly through the IMF.

              The UK government should think again. Instead of this muddle the UK should start from the proposition of what is best for the UK, and then set about selling it to the other EU members. The UK should use every bargaining strength it has. It has two major ones. The first is Euroland needs UK consent to Treaty changes. The second is 80% of the British people do not support our current relationship, and either want to leave or want substantial powers of self government returned to us. The UK government should grasp just how frightened of referenda the EU now is, and could  threaten one.

               So what do we want out of our relationship with the rest of the EU and Euroland?  We want a peaceful friendship. We want to carry on trading on sensible terms. We need some agreements to cover detailed matters like air and sea links, matters of common environmental importance like pollution and noise, double taxation arrangements, and an extradition system. We have these type of agreements with non EU countries through bilateral negotiation and international treaties, but for the EU they are now subsumed within the acquis communitaire or common law codes. Many of us at least want our full rebate back on the budget, as the EU did not deliver the reform of agricultural spending promised as the offset. A new relationship could clarify where we are happy with shared law making, and how ti should be decided.

             On defence and foreign afairs we should continue to make NATO the cornerstone. We should politely decline  further involvement in EU based defence initiatives. Foreign policy should remain a UK matter. We might take a common stance with the rest of the EU where it suited them and us, but each matter should  be judged on its merits and subject to veto or opt out.

             On trade and commerce we should simplify. All we really need is the right to offer goods and services for sale. This does not need to be complicated by hundreds of laws laying out in detail how you make a tyre or provide an insurance policy. Given the huge accretion of law and regulation I suggest negotiating the right for the UK to disapply any EU regulation that the UK Parliament does not accept. First the UK would offer amendment or repeal to all EU members as our preferred way of tackling it, setting out our reasons. If the EU disagrees we should have the power to disapply the measure through Parliamentary process.

              The same should apply to areas like the environment, transport and energy where the EU has come to legislate and regulate substantially.

                 The EU should be given a simple choice. If it offers us such a deal then the UK government would recommend it to the British people and would  campaign to carry the vote in a referendum. If the EU refuses to give us a satisfactory deal the UK would still have a referendum, and the British people might decide to leave altogether. As a concession to the rest of the EU the UK might offer a different arrangement on the EU budget, as otherwise the UK could opt itself out on a permanent basis. In practice our budget contribution would need to be negotiated in the light of how much we stayed in. If we took ourselves out of the agriculture policy, for example, we would need a substantial reduction in fee.

 

 

 

 

           As Mrs Merkel drives Euroland towards greater EU control over budgets and economies I would like Mr Cameron to say the UK needs a different relationship with this emerging state. It is up to them how they pay for their currency and their wider union, as logn as we are not expected to contribute. The UK should only consent to the changes they need if we get protection from the legal and financial demands they increasingly wish to impose on us.  I will write more tomorrow about this.

 

           Thanks to the policies of the last government, the UK entered this decade as one of the most heavily borrowed countries of all. Private sector borrowings peaked at more than 200% of GDP. The company sector has cuts its debts a bit  in the last two years despite the lower levels of activity, and individuals have stopped their debts overall from going up any more. The public sector has debts of around 250% of GDP.

           The last government claimed UK public debt was under 70% of GDP, as they just quoted the figures for state borrowings through the issue of bonds. This debt is now around £1 trillion. On top of this there are the debts of the banks where taxpayers have a stake. This adds £1.4 trillion to the total. There are then the unfunded public sector pension liabilities of £1.3 trillion. The new government has set all this out, to give a more honest account of the UK balance sheet.

            Some say you should add in the future costs of the basic state retirement pension scheme. The government thinks this is balanced by future NI and Income tax revenues, and has always been a pay as you go scheme, so it has not chosen to do so. I have no disagreement with their approach, as you have to draw the line somewhere  about how many items of future public spending you capitalise, and how many you treat as a call on future income.  

            The government, the Opposition and most commentators agree that the current levels of UK debt are too high, and need to be controlled, and eventually brought down. The argument is not over whether to do this, but how, and at what pace.

           I think the government needs a strategy to tackle all three elements of the balance sheet weakness in the public sector. I think it needs to do it speedily, as the overall levels are far too high and far too risky for taxpayers. Cutting banking risk for taxpayers is to me an urgent priority. Governments are not well equipped to run banks. Taxpayers should not be standing behind the large position  risks run in say the RBS investment bank, and subsidising the large salaries they still pay as if they were a profit making privately financed operation. Yesterday’s decision to sell Northern Rock at a loss was a welcome first step.

          There is no point people tut tutting about losses on these holdings. The last government  was wrong to buy these stakes at the prices they paid. We were bound to lose money on them. Recognising  the loss is a necessary part of sorting them out and passing them on to owners who may be able to make them useful to our economy and turn a profit.Those profits can then be taxed.  That was why I at the time recommended controlled administration.

              I said they  should only support the few bits that really mattered, and let the shareholders and bondholders take the hit on the investment and overseas banks and other non bank businesses.  It was  a policy recommendation which prefigured what are now call living wills. I am glad the policy has been adopted for the future. It is just a very epxensive pity they didn’t do it last time. There is little point in extend and pretend, trying to believe that the assets are worth what you want them to be worth instead of worth what the market now values them at.

          Former Northern Rock shareholders feel badly treated. In the summer of 2007 I argued that the Bank of England and the government should have put more money into the wholesale markets. Had they done so I do not think Northern Rock would have gone bust . They put more than I suggested into the markets, but only after the troubles at the Rock. Timing is everything.  Northern Rock started with a liquidity problem which the authorities refused to help sort out. It became a more fundamental problem, as the shortage of money brought on a drop in property values, which damaged a mortgage based bank. It was all predictable and avoidable. Becuase it was not avoided, shareholders have to accept that their bank did go under and so they lost their money.

            The government is attempting to cut the unfunded costs of public sector pensions.  We might well return to that in more detail at a later date.

               Most of the attention is focused on the smallest of the three liabilities, the public debt proper. Labour is now arguing that the government will borrow £100 billion more than their original plan. I have made it clear for months that the government is bound to borrow more than the forecasts in June 2010. The government itself raised its estimate of the extra amount it would borrow over the five years by £34 billion in March 2011, so it’s not much of a surprise. The mainstream media ignored this change of forecast until this week, but are now taking it more seriously because Labour is highlighting it.

                     In previous pieces I have said I expect the government to forecast a further increase in the 5 year borrowing when they make their Autumn  Statement at the end of this month. I estimated that they will probably say they need to borrow extra  over the five year period, to allow for the slower growth they need to assume for this year and next. It is likely that the Bank of England’s lower forecast of growth, taking it down to 1% this year and1% next year, sets the tone for the official OBR forecast in the Autumn Statement. This compares with 1.7% and 2.5% in the March official forecast. Losing that amount of growth will lose more revenue on top of the £34 bn adjustment made in March. Labour has made claims that the extra  adjustment in this Autumn Statement to the official borrowing figure  will be much bigger than the March adjustment, which seems to me to be unlikely.  

                      The government has rightly said it intends to remove the structural deficit over the lifetime of this Parliament. It has reaffirmed that it will do this despite the falling growth forecast.It can do so and should do so. The total borrowings over the period will however, be higher than the 2010 plans, as the cyclical deficit will be higher. This is all very old news to readers of this blog, as we have reworked the figures before. It is also common ground between Labour and the government that the best answer to get the deficit down more quickly is faster growth.  The battle of the Autumn Statement will be about how you can do this.

                 In order to succeed in eliminating the structural deficit the government might be wise to have a freeze on current public spending for a period, instead of persisting with increases in cash spending. Over the last year,as most in the media refuse to acknowledge, real public spending increased, as the government’s own official figures for GDP make clear.  Today’s news that the MOD has been spending £25o million a year on consultancies to help it buy things show there is still plenty of low hanging fruit for it to cut out. What is true of the MOD which is being asked to make real cuts, will be even more true of depertments allowed to increase their spending.

 

 

         I support the sale of Northern Rock. I will write tomorrow about why, and how we need much more action to cut the financial risks of the state. This is an important small first step in reducing the massive inherited liabilities of the government.

          Meanwhile, bond yields for Spain and France are rising, showing the Euro crisis is getting worse.

Today’s 10 year government bond yields:

 

Greece   28.9%         15.4x Germany

Portugal   11.3%         6x

Ireland   8.2%            4.4x

Spain    6.97 %              3.7x

Italy    6.86%                3.66x

Belgium   4.9%             2.6x

France      3.6%            1.94x

Austria     3.6%           1.9x

Germany 1.87%          1x

 

              Parliament has woken up to the bad habits of some private sector car parks.  MPs want a limit on fines and clamping when people make mistakes in a private car park, or when they try it on and seek to avoid payment. Let’s hope the new rules work.

                Most of the parking problems I encounter for constituents relate not to private sector car parks on someone else’s land, but to public sector car parks on the public’s land.  Car parking should be a public service. It has been turned into a branch of the criminal law, in order to provide a steady stream of public revenue from fines and charges.

                Of course Councils need to keep the highways free flowing. Providing more off street car parks is a good way to do this. Where on street parking is allowed, it should be organised to avoid blocking the highway. Where people ignore the parking areas and decide selfishly to block a road or a driveway,  I have no problem with enforcement being tough.

                 Increasingly Councils impose more complex rules and higher charges on parking in designated places on and off highway just for the sake of it. There is a current passion in many places to narrow roads, removing parking places at off peak times in the process.  There is a growing love of complexity, so an individual needs to study the rules carefully before being sure that they can park in a designated place at a particular time on a particular day.

                 Sometimes the  rules are unclear about bank holidays, or Sundays. Sometimes there are several different rules applying to on street spaces on the same stretch of street. Often there are no regular and clearly expressed signs to tell you the hours that apply to single yellow line prohibitions on parking.  Any misunderstanding can lead to a large fine and even to clamping or tow away, when the car is parked in what is  a parking place for some of the time, showing it is not any great threat or impediment to the highway.

                Off street car parks can make life difficult for shoppers. Some Council car parks make you predict in advance how long you wish to park for, and to buy that amount of time when you leave the vehicle. This can put you under pressure in the shopping centre, if it turns out to be more time consuming to find what you want to buy, or if there are crowds and queues.  Allowing you to purchase  more time when you return, or requesting payment only on return, would help the shopper, and help promote the shops.

                Having the right change can also be an issue. Now some car parks charge so much for the time you need, you have to carry a pocket full of change. Not all car park pay machines take all coins, making an additional hazard for you.

                Councils usually say they want to promote their local shopping centre. They should start by reviewing their car parks. They should cut the charges, where they are too high. They should make the rules easier. They should allow people to overrun their original time and pay the extra for a reasonable extension. Free parking in Council car parks at off peak times and to encourage use of the local shops could be a welcome shot in the arm for ailing High Streets.

              It is high time Councils remembered that Council car parks, on and off street, should be public services that assist the public. They are on public land, and should be run for us the public. Westminster Council would be wise to think again about its latest plans, which are encountering plenty of opposition.