There is something badly wrong with the Bank of England’s forecasts for inflation. The absence of money and credit from their thinking seems to guarantee they get it wrong. Because they get the forecasts wrong they get the policy wrong.

Their aim is to show inflation will be around the target of 2% in two years time. Quite reasonably they allow themselves some shorter term flexibility around this longer term target. Their problem includes an overwhelming tendency to lurch based on what has just happened to inflation. I call it rear view mirror driving, when what they need is a better view of the road ahead to avoid a crash.

Let us take the last two years. In May 2021 the Bank concluded that inflation in two years time would reach 2%. Because immediate past inflation was below target they decided to carry on with an interest rate of 0.1% and with printing more money to buy up bonds. The more bonds they bought the higher the prices went so the lower the longer term interest rates went. It was an invitation to a credit party where the credit was so cheap. Some of us at the time warned against more money printing and further lowering of longer term rates, pointing to the already visible recovery in the economy and the increases in money and credit. “I see no inflation coming” meant they were looking the wrong way.

By May 2022 the inflation was already well set. It hit 5.5% before the invasion of Ukraine, and then went higher as the energy and food price consequences of that came in. The Bank set an interest rate of just 1% and said rates might in future need to get up to 2.5%. On that basis they forecast inflation would be back down to 2% by 2024 and below target at 1.3% in 2025. Some hope.

This May they decided to hike interest rates by an additional  25bp or 0.25% to 4.5% and continue with a large bond selling programme designed to cut money and credit further and drive rates higher. On that basis they forecast 2% inflation by 2025 which may be nearer the mark. Unfortunately it comes with the price of overdoing the tightening meaning a bigger real income squeeze and a big slowdown in growth. They are  now mesmerised by the inflation they have created and unable to see that the dramatic money tightening they have undertaken will come through. So they now want to do too much too late. The rear view mirror tells them to slam on the brakes when the  vehicle is scarcely moving.

I am told grown ups follow Treasury orthodoxy and admire the Bank of England with its independence. The governments that have followed these luminaries have usually put the economy through a boom/bust cycle and have invariably lost if they own the bust.

Edward Heath accepted advice to introduce competition and credit control in the early 1970s when the dollar went off the gold standard. A big inflation was created, to be followed by a sharp collapse just in time for the 1974 elections which Heath lost. There was a secondary banking crisis and property slump. The Labour government which followed i chose an inflation prone high borrowing high tax strategy of its own which ended in a further bust when it collided with financial reality.

John Major adopted Treasury and Bank advice by joining the European Exchange Rate Mechanism. Some of us warned this would be damaging and destabilising but the grown ups knew best. They brought on an inflation by printing too much money to keep the pound down, then a savage recession by slashing money to try to rescue a tumbling sterling. The Conservatives went down to a huge defeat even though Labour , the CBI and TUC had all backed the failed policy.

Gordon Brown and Tony Blair in the period 2005-9 accepted Treasury and Bank advice that they could allow a major expansion of banking credit and debt because there had been a new model of global banks that would magically smooth away the risks of excessive leverage. Indeed Gordon Brown didn’t just accept this woeful official advice but was part of the world foolishness that generated the idea. The Parliamentary opposition warned against so much state debt and private borrowing. The official advice shifted to demanding a deep recession to wipe out the inflation and some of the debts. Gordon Brown as PM agreed and was thrown out of office as a result.

Today it is possible to avoid the bust. The official advice has already given us the big inflation. According to government and Opposition the Bank is independent and is responsible for enforcing the 2% inflation target. It has lamentably failed, allowing inflation to hit 11%. It blames external events beyond its control, yet it did not warn us of the big inflation coming and fails to explain how Japanese, Swiss and Chinese inflation stayed down if it was just a matter of high international energy prices.

As constitutionally the government is responsible for the huge balance sheet the Bank of England has created by borrowing to buy up a load of bonds, the government should tell the Bank to stop selling these bonds back into the market at large losses as they are currently doing. taxpayers should not have to take the hit. Money and credit are tight. To avoid the recession action is needed now. The Bank has done too much too late to conquer inflation. Its inflation forecasts yo yo around  undermining the credibility of its actions.  How can anyone admire a Bank which deliberately bought too many bonds at crazily high prices and then wants to sell them at much lower prices to make the taxpayers pay for the losses?

John Redwood, Wokingham, Conservative: 
I agree with the Secretary of State that we need more energy independence and more domestic energy, so why does the Bill propose a 140% increase in imported energy through interconnectors, which will make us more dependent and very vulnerable?

Grant Shapps, Minister of State for Energy Security and Net Zero:
My right hon. Friend makes an excellent comment, as ever, on interconnectors, but I would point out that with the growing number of interconnectors, particularly electricity interconnectors, last winter, for example, we were able to export 10 TW to France through interconnectors, providing us with income. The answer is that they work in both directions, and in some cases, they provide the reliability of, for example, France’s vast nuclear fleet of 56 reactors. When whose reactors were down last winter—because even nuclear power sometimes has to come offline—we have been able to export our power to France, and it has been a net export. Our mission is to secure the clean and inexpensive energy that Britain needs to prosper.

Brexit has delivered two important changes that get no mention. We no longer pay annual contributions to the EU – and have increased the NHS budget by more than the savings and by more than proposed on the bus. We no longer come under the large amounts of new law coming out of Brussels, leaving us free to decide if we want a law at all and if so what would be the best one for us. Many hundreds of pieces of legislation passed since we left do not apply in GB.

The PM promised to carry on with the Bill planned by his predecessors, the EU Retained Law Bill. He saw the advantage of tailoring law to our needs. The aim was to remove all those inherited laws from the Statute book that were no longer relevant to us, the ones we had opposed unsuccessfully as members, and the ones where we could put  in place something more effective for us. Jacob Rees Mogg when Business Secretary got the civil service to produce a website or dashboard with all the pieces of relevant law listed.

When I set out to write this yesterday officials had taken the dashboard down and left a message saying this useful resource is “no longer available”. That was a chilling message. When I complained it reappeared.   It seems to square with news leaks that the current  Business Secretary wishes to dilute the legislation, turning it into a device to keep most EU laws instead of initiating the proper review we need. Officials were said to always have been reluctant to carry out the exercise and to recommend pruning EU law. Clearly some senior officials and some business lobby groups have forgotten the good reasons the UK had for trying to prevent or to modify endless EU legislative proposals when we were a member. My main recollection from my days as Single Market Minister were  many  discussions, lobbyings and meetings to try to stall or dilute unwanted legislation that mainly served to give the EU more powers over more areas of government and our lives. It was doing the detailed work as Single market Minister and seeing the damage to innovation, small business and enterprise that much of the regulation would do that made me consider changing our relationship with the emerging government of the EU.

The EU Retained law Bill passed the Commons with a large majority and little Conservative disagreement. It would be odd if Labour decided to use their peers to try to wreck one of the gains of Brexit close to an election, after they lost so many votes over trying to stop Brexit in the previous Parliament. I hope the PM tells the Business Secretary if she does want to dilute this to think again. We could be better for freeing ourselves of laws that cost too much and get in the way. Of course the plan was always to keep important employment, safety  and environmental safeguards and where necessary to continue with our UK policy of going beyond the core standards laid down by the EU in those areas.

Please find below my Interview with Talk TV’s Richard Tice where we discussed the Coronation, the local election results and net migration.

You can find my interview below between 26:18-36:48.

Yesterday we debated the Energy Bill. This piece of legislation has support from the main Opposition parties and is more to do with the road to net zero than how to have plentiful good value energy for homes and businesses. It proposes additional complex regulations to seek faster movement to a decarbonised future.

It raises a number of questions which I have been posing to Ministers and the wider public in my words on energy. They include

Why does it require a 140% increase in our interconnector capacity to be able to import more energy from the continent? If the aim is energy self sufficiency and more domestic production we should not need that extra spending on connectors.

How will a £20 bn spend on carbon capture and storage be paid for? The Secretary of State says the Uk has storage for £5 trillion of saved carbon costs, but as the saved carbon costs are presumably at least in part UK tax revenues foregone from emissions trading and carbon taxes, it is not obvious to see how the money is raised to purchase the facilities or how the costs of running them are defrayed, other than through other additional tax payments.

What impact will the higher standards for the energy performance of buildings have on the supply of rented accommodation? Isn’t there a danger more landlords will decide they cannot afford the extra costs of installation of energy saving measures and will withdraw their properties from the rented market? What will be the rent increase where they do put in the new measures?

The Bill talks about the need for more smart machines and more time switching to ration available electricity. People will not be able to come home from work, put an electric car on charge and turn on a series of home appliances all at the same time but will need persuading or requiring to run some machines and rechargers overnight when there is less electricity demand. What will the likely balance be between discounted night rates, penalty day rates and cut outs or bans on smart machine use and via smart meters?

The Bill perpetuates a complex system of managed prices, price controls, bidding competitions for rights to supply, windfall taxes, company subsidies and government interventions to try to ensure sufficient power. What impact does this wide ranging and frequently changing set of interventions have on private sector willingness to invest in future energy provision?

The government says it wants nuclear to play an important part of reliable domestic electricity supply, yet on current plans nuclear output reduces substantially this decade with various closures and only one opening of a new station. When will firm orders be placed for small nuclear installations?

Why is grid expansion proposed at only a doubling when if most people had electric cars and heat pumps and industry had gone largely electric we would need considerably more capacity than that?

The ever growing population of the UK means more to feed and clothe, more utilities needed, more to house and more needing school places and medical care. The UK needs to do more to promote extra capacity to meet these needs.

Instead tax and regulation is getting in the way of producing more. This decade we have lost 700,000 self employed when we need more to set up in business. The government should revert to IR 35 rules used prior to 2017. It should be easier to get started as self employed.

The Treasury should raise the VAT registration threshold from £85,000 to £250,000. Too many small businesses turn down business to avoid the need to register.

The government should remove the 31% hike to corporation tax. If it was really serious about more investment and getting the deficit down it would cut the rate to 15% to attract more large companies.

The government should lift the planned ban on making and selling new diesel and petrol cars in 2030. The ban is putting car companies off investing here.

DEFRA should stop offering grants to farmers to prevent them farming. The money for wilding should be switched to supporting growing food.

The Business Department should suspend the emissions trading and carbon tax system. This is imposing the highest taxes on UK steel, ceramics, glass and other intensive industries of the advanced world. It is leading to closures.

We need to foster enterprise and promote home production. That would bring prices under control.

The UK, Euroland and the USA all have “independent” Central Banks, all are charged with keeping inflation around 2% and all presided over inflation surging to around five times target. They all blamed energy prices that were driven up by the Ukraine war, ignoring inflation well above target before the invasion. They do not ask how Chinese inflation stayed around 2% and Japanese around 3% despite importing a lot of energy. Nor do they tell us why inflation has stayed high long after the oil price subsided.

All three printed large sums of money and deliberately paid very high prices for bonds in 2021 during recovery , driving interest rates to very low levels. They stubbornly refuse to even accept the inflation in assets they created let alone the more general inflation these irresponsible policies were bound to cause.

Now they have lurched too far the other way. Cutting the money supply, selling bonds off or accepting maturity repayments at big losses they are trying to bring on downturns. The Bank of England’s rate rising announcement of large bond sales undermined the pension fund/LDI market so they temporarily had to reverse the bond sale policy and buy up some more. The Fed has helped undermine some large US regional banks with bond price drops and had to tip an extra $400 bn of money into markets to stop a wider collapse.

All 3 Banks should invite in some new people and new thinking. They have done damage through inflation and slowdown policies. They need to monitor and understand the path of money and credit growth to avoid these big errors.

The government faces grave difficulties in securing a pro growth economic policy from both the OBR and Bank. The OBR regularly makes large errors in its forecasts of the future deficit yet the whole fiscal stance is based around the OBR five year forecast. The truth is no one including the OBR can get to within £50 bn of accuracy for that figure with any reliability given the huge number of variables that will affect it over a 5 year period.

Indeed, the OBR has been unable to forecast the one year figure in recent years with any accuracy. In March 2022 the budget forecast for that year was a deficit of £99 bn. Some of us said that was too low at the time. In November that was hiked to £177 bn. The current view of the outcome was just £132 bn. So since the budget of November 2022 with no further policy change the OBR has been £45 bn out! In 2021-2 the budget forecast overstated that year’s deficit by £131 bn.

What should be done?

The OBR should be asked to revise its models. They should provide an honest account of why their deficit forecasting has gone so wrong. Whilst there have been some in year policy changes, the main problem seems to be the revenue forecasts on unchanged policies. Their model wrongly thinks lower tax rates raise less money and higher tax rates more, without putting in a factor for behavioural change and for the rate of underlying growth to correct. Tax revenues are very sensitive to the rate of economic growth, as a marginal pound of extra output or income is taxed highly. Recessions lower profits and incomes cutting tax inflows. The OBR’s ability to forecast spend on unchanged policies is also impaired where they need to work on estimates of take up of subsidy and benefit schemes.
The government should remain committed to getting debt as a percentage of GDP and deficits down in future. It needs to explain how sensitive deficits are to growth, and explain how adopting a better pro growth strategy would assist deficit reduction. It needs to adopt a pro growth strategy and draw on past experience to show how and why faster growth will prove OBR deficit forecasts wrong if they persist with high deficit estimates.
The government needs to make the case for lower tax rates bringing in more revenue. The Thatcher cuts in income tax brought in much more revenue from higher earners. The Osborne cuts in corporation tax brought in more business tax. Above all modern Ireland shows that you can collect four times as much from business proportionate to the size of the economy by setting a 12.5% tax rate.

The Coronation is based on ancient ceremony from a time when monarchs had executive power as head of government. Our service also reflects the complex relationship with the Christian Church that emerged as the established Church of England from the Reformation.
Last century coronations evolved into grand spectacles, to create a holiday mood for the public and to engage people in the change of Head of State. The great show became a celebration of our country, a projection of our country to the rest of the world, and a search for what unites us. Prime Minister and Leader of the Opposition sit down together, smile on the proceedings and affirm God save the King. In return the monarch promises to serve us all and to stay above political controversy.
I trust today’s event will proceed faultlessly and be enjoyed by all who participate, in person or at home. In a free society we are all at liberty to have our own views on both the individual monarch and the institution of monarchy. We can join in and enjoy or do something else today. For our country’s sake it is good if all goes well, foreign guests are welcomed, and diplomacy advanced in the margins of the varied programme. The new King will use his influence both to accept his role as Head of the Anglican Church and his interest in including all the faiths in the service.