I spoke yesterday in a Westminster Hall debate about the UK’s energy security. The Minister Greg Hands confirmed that the UK is pressing ahead with new oil and gas investments as part of an effort to reduce European dependence on Russian hydrocarbons. He told us the UK is supplying gas to the continent this summer from its LNG import facilities, to help fill their storage facilities ahead of the winter. The UK of course has  very little storage of its own. It had low storage because it used to be able to produce 100% of the gas we needed so the storage was the original gas fields themselves.

The Opposition parties continued to live in a make believe world where a bit more investment in windfarms would solve the problems of our energy supply. They revealed two mistakes in their thinking. They firstly failed to realise that electricity supplies a minority of our total energy needs, as we depend substantially on gas delivered direct to homes and factories for heat and power, and on petrol and diesel for much of our transport. If you wish to depend on renewables you first have to convert all vehicles to electricity and take all homes and factories off gas. They secondly would not accept that our present solar and wind power is intermittent, meaning we need to have back up generation capacity for when the wind does  not blow and the sun does not shine. We are often generating a majority of our electricity from gas, wood pellets, and  coal.

I reminded them that to make more wind and solar work we will need ways of storing the electrical power generated when intermittent sources do work to use on days when they do not. That may be large batteries. It might be conversion of the renewable electricity to green hydrogen for use in our boilers and  vehicles. There might also be breakthroughs to allow gas or coal to be burned in power stations with carbon capture and storage systems to achieve CO2 goals.

You might have thought official forecasters would have given up trying to prove their wildly pessimistic forecasts about Brexit had a point. After all they said unemployment would rise and it fell, that interest rates would go up and they went down, that GDP would go down and it went up. It was curious that the Bank and Treasury “independent” forecasters , the officials, felt able to publish these pieces. We were told it was fine because it was government policy to stay in the EU so supportive forecasts reflected government wishes. We do not however have them publishing supportive forecasts during a General election, even though Ministers can say it is their government policy for them to get re elected. The officials rightly respect the need for electors to make their own minds up over who to have in government uninfluenced by special official forecasts serving the current government.

I had chosen to remind people of the very inaccurate recent official forecasts of our economy to query some of the policy advice currently being given  to Ministers based on strange views of how the economy has worked in the past. I then heard that the OBR has revived a claim that leaving the EU will cost us 4% of GDP. How do they know this? Over what time period? Why doesn’t the outcome depend on what policies are now being followed?

The OBR has drawn on other people’s work, and it all seems to be based on guesses about trade. They claim trade with the EU will fall and this will cause a fall in productivity which leads to their very precise 4% GDP shortfall.If we lose exports to the EU but at the same time make and grow more things at home to cut imports from the EU that may boost GDP, not reduce it. They do not have to be less productive as they will need modern capital investment and be geared to our shortage of labour.  If we bring down our trade deficit overall we could have a stronger economy. The import model within the single market entailed the loss of a lot of UK capacity and jobs.It meant borrowing more and more money to pay the import  bills or required us to sell our assets to foreigners.

Taxpayers pay good money to have an “independent” civil service body to evaluate U.K. economic policy and supply forecasts of what that policy will deliver.

In March 2021 they did their usual budget forecast out to 2025. They said inflation would be below 2% until 2025 when it would just reach 2%.  Inflation a year later hit 9%.

If you use the war in Ukraine as an excuse you still have to explain why inflation was at 5.5% in January pre war, 175% over target and more over forecast.

They forecast growth will never be lower than 1.6% a year out to 2025. March to June this year probably saw no growth and growth in Q3 will depend on the emergency cash injections recently announced as budget adjustments.

This shows the OBR/Treasury have models that do not work based on misunderstandings of the economy. This  matters. They give wrong policy advice to the Chancellor. He should challenge it more and act on it less.

 

In OBR world cutting tax rates leads to a loss of revenue, yet if you cut the  right taxes it stimulates more activity and brings rising receipts. In OBR world if you increase taxes the deficit falls. If you raise taxes too much in reality you slow the economy too  much and the deficit rises.In OBR world if you are running below capacity there will be little inflation. In the real world if you expand money and credit massively you get inflation four and half times target even when below capacity as they judge it.

OBR/Treasury advice is in danger of delivering unacceptably  high inflation and a recession to follow. They have a long record of boom/bust advice. Why do it again?

We could  get similar and some  better forecasts free from the private sector to help inform budget judgements.

We read the government is thinking of fifty year cross generational mortgages to help people buy a home. They also need to look at supply/demand balances.

Most of the debate centres around the need to build more. It is time the government looked at demand. All the time we invite in an additional 250,000 people a year we need to build a large number of homes for people who do not yet live here. We of course want people coming to our country to live and work to have decent housing. This then helps drive prices too high for young people growing up here.

We should be less generous with permits for more economic migrants. We should make more determined efforts to help people living here off benefits and into jobs. We should do more to encourage and support investment in machinery and AI to replace lower paid jobs. Many people want to buy their own home but there is a shortage of available affordable homes for sale. Time to reduce economic  migration  into the U.K..

Worldwide advanced country governments are committed to the road to net zero  by 2050. Their plan at Glasgow COP 26 was to speed progress. The sudden invasion of Ukraine disrupted the supply of oil and gas, drove up prices and made them more apprehensive about their duty to keep the lights on and  homes warm. The EU announced that it would henceforth regard gas as a green transition fuel and accept more of it. President Biden turned from wanting the rapid run down of oil and gas production in the USA to boasting that more oil and gas is now being produced on his watch than happened in early  Trump. The President is urging oil and gas companies to drill and produce more, and urging refineries to convert more to products. In the UK the government has moved policy on to favour North Sea oil and gas production instead of imports, and is examining the case for allowing onshore gas drilling again.

I would be interested in your thoughts on how far this rethink should go? How much more do governments need to do for the current decade to offer enough affordable energy?  It is clear India and China as large users of energy and producers of CO2 now plan to mine and burn yet more coal, delaying the world’s wish to move on from coal as soon as possible. Germany too is being forced short term into more reliance on coal as Russia cuts the supply of gas via pipeline.

Decarbonisation plans hinge on wholesale electrification of heating, industrial processes, transport and much else. In turn this will need a massive expansion of electrical power generation which must come from renewables or nuclear. It looks as if this will need methods of storing surplus wind and solar power when it is available to deliver enough power when the sun does not shine and the wind does  not blow or blows too much.  What do we think a realistic timetable is for installing the extra capacity and confirming the technologies for storage and smoothing?

It will also need a consumer revolution. People will need to accept the free smart meters which half the public refuses. Consumers will need to be tempted in large numbers to buy heat pumps and electric cars. How far off a popular revolution are we? Without it decarbonisation will make slow progress, and the huge increases in CO2 from the emerging world led by China will overwhelm  the global figures.

This week at the G7 Germany as host nation invited Senegal, South Africa, Argentina, Indonesia and India to join the members. India as one of the largest economies and the most populated democracy has been several times before. The presence of two African nations shortly after Chancellor Scholz’s three nation African trip is more interesting. 

    The EU has  been stung by the exit of France from Mali and the growing influence of Russia in the Safel, the long belt of land to the south of the Sahara from coast to coast. The EU wishes to buttress its influence in this region, offer military training and assistance against Islamic terrorism and help stabilise countries to cut the flows of migrants northwards. Spain is particularly keen to extend an African policy to NATO as well as the EU. Recent dangerous eruptions of groups of  migrants through the high and tough fencing that separates Meililla from Morocco has worried them. More than 23 people died in one of the attempts to break into the Spanish enclave on the north coast of Africa. 

    The EU is keen to establish military trainers and advisers in these states to help them with establishing and maintaining order. Chancellor Scholz was offering EU food as trade for Senegal at a time of disruption to |Ukraine grain supplies to the region. He went on to South Africa to develop the long standing relationship with Sasol to create low or no  carbon fuel substitutes for petrol and diesel. 

History shows us that Treasury and Bank advice for the last fifty years has been poor, or in some cases Treasury advisers failed to prevent Chancellors making bad mistakes. 

 

1970-73   The Bank allowed a massive explosion of credit, creating a secondary banking and property crisis. Inflation took off, and the Bank posted  higher rates to contain it. A collapse was inevitable

1973-4   An oil crisis brought on by OPEC hike oil prices and cutting supply added to the inflation. Higher interest rates and the net income hit from higher prices took the economy into recession and brought the property and banking system into trouble. 

The Conservative government followed pay and price policies which did not work and failed to control the boom/bust policy of the Bank of England over credit and property valuations.

JR view – too  inexperienced to have a  view of the policy errors. 

1974-6  A Labour government came in thanks to economic failure by outgoing Conservatives. It decided to spend and borrow too much. Inflation continued and the government was forced into a visit to the IMF to borrow money to shore up the falling pound.

1976-9 Inflation and low growth stalked the UK economy , allied to a winter of strikes. 

JR view I disagreed with  the big uplifts in public spending and borrowing , especially through nationalised industries and saw them as inflationary and negative for growth

The Labour government followed a disastrous economic policy unconstrained by Bank or Treasury advice or maybe with their agreement. 

1990-92  The UK joins the European Exchange Rate Mechanism. Economy enters a period of too much money and credit expansion,  bringing on inflation, to be followed by a weak pound, excessive monetary tightening and a big recession. 

JR view I wrote a pamphlet explaining how the ERM would be destabilising and argued the case against joining and against  staying in. 

The Conservative government was to blame for accepting strongly held Bank and Treasury advice to join and sticking with it after it was clear it was a disaster. Conservatives were evicted from government for 13 years for economic incompetence. 

2004-7  Treasury, Bank and Gordon Brown allowed a big increase in credit and expansion of commercial  bank balance sheets, claiming this would not be inflationary. Balance sheets of banks and borrowers become very overextended and inflation rose. Bank, Treasury and government then reined in credit too abruptly, raised rates and forced write offs of debt leading to the great financial crash and recession of 2008-9

 

JR view I opposed with my party the big build up in debt, and I also opposed correcting the imbalances so abruptly in a way  designed to bring on bank collapses. 

The Labour government lost office, so far for 12 years, based on its economic incompetence. 

During all this time of boom/bust and defeats of governments I do not recall much comment on  senior Bank of England or Treasury officials offering bad advice. Some of these events were  brought on by following official advice. There has been no proper enquiry into bad advice and wrong forecasts. 

Some Conservatives are taking heart from the fact that in Wakefield and Honiton  Conservatives stayed away rather than switching to Labour. It should after all be easier to persuade abstainers back than to tell switchers they have got it wrong. In Wakefield there was also an unusually high percentage voting for some of the many fringe parties and candidates that seek some attention on a by election hustings. Independent candidates  normally get less than 1% of the vote each.  One of the Independents got 7.6% of the vote, the Yorkshire party polled 4.3% and Reform and Britain First together got 3%, more than the Lib Dems scored. Many of these voters could be attracted to a stronger Conservative offer.

 

Understanding why Conservative voters abstained or voted for candidates other than the three main parties is crucial for the government to do the right thing from here. The idea of a Red Wall is unhelpful. Voters in former Labour seats voted Conservative in 2019 because they wanted something different to the Labour offer of a bigger public sector, a preoccupation with political correctness and higher taxes, not because they wanted a Conservative version of the same.

 

 They wanted more than Brexit in name only. They wanted a proud UK to use her newly won freedoms to promote prosperity for the many and to place the UK back on the global stage without instruction or limitation from Brussels. They had concluded that sending more money to the local Council, spending more on new public buildings and looking for the civil service to make everyone better off was not going to work. They disliked the EU model of closing down much productive capacity in the UK to import from the continent.  They wanted a more enterprising freer UK where government helped people get on in the world. They wanted home ownership for the many, more opportunity to work for yourself, to set up a small business, to gain shares and bonuses by working for a good private sector firm, to receive the education  and training needed to get promoted. Labour’s collective and state organised ideas often stifled individuals and families making a success of their own plans for ownership, self improvement and better paid employment. 

 

They expected Conservatives to lower taxes on work and enterprise, to promote more employment and to back business. They assumed that whilst there would be more money for schools and hospitals Conservative Ministers would be careful to control overall spending and would not allow an unwieldy bureaucracy to grow and grow without restraint. They did not want more quangos lecturing us on what we were allowed to say ,on  how we should lead our lives and why we must buy a heat pump.  They looked forward to ending the large payments to the EU and wanted overseas aid removed from countries with nuclear weapons or space programmes. Many people refused a free smart meter and opposed more surveillance as examples of  creeping government control. 

 

So why do so many of them  now feel they have not got what they asked for? They did not expect a Conservative Chancellor to authorise huge extra quantities of money printing last year in a way that was bound to lead to more inflation. They did not ask  him to underwrite with their money another £150bn of bond buying by the Bank of England, paying very high prices for the bonds. They certainly did not vote for a hike in National Insurance, a tax rise expressly ruled out in the Conservative Manifesto. They did not want IR35 strengthened further to put off people working for themselves. They hoped that VAT would come down or be taken off things like domestic heating once we were free of the EU and able to set our own tax rates. When the Ukraine war added a further nasty twist to the inflationary spiral they expected the Chancellor to cut the VAT rates on electricity, gas, diesel and petrol, not to use it as an opportunity to tax us more on these necessities. 

 

So what should the government do  now to prove it has understood the message of the voters in recent elections? The main changes have to come from the Treasury. It is bad economic policy that is doing the damage. The hit to real incomes is too hard, taxes are too high, and current policy threatens us with a recession. The government needs a convincing growth strategy. That requires immediate action to cut VAT on fuels to ease the squeeze and cut the prices. It means binning the planned 31% increase in the rate of Corporation tax on businesses and stopping the attack on home produced energy through the supplementary profits or windfall tax they are planning. The Chancellor rightly wants an investment led recovery with more capacity being put into the UK. He will not get that if he serves up higher business taxes and a recession. 

 

The government should go all out to create the best environment for business investment and growth in the advanced world. Strong businesses will bring more jobs, better paid jobs and more capacity. The UK as a result of years in the single market depends far too much on imports for everything from temperate food to energy, from steel to  cars which it can produce for itself. If we matched the Irish corporation tax rate we could add to our capacity much more quickly and collect more in total business tax revenue. If the Treasury beefed up the freedoms in the Freeports that could help us grow new industries. 

 

There are some signs that the Business department does want us to produce more of our own gas at a time of global shortage. The new oil and gas fields including Jackdaw, Cambo and Rosebank should be brought into use. That will cut our CO2 compared to importing LNG, create more better paid jobs and give the Treasury another tax windfall. There is some work now on a domestic food strategy. We could grow so much more for ourselves at a time of Russian induced shortage. Instead of EU grants to pull the trees out of our orchards we need Uk help to replant. The UK with access to more gas could rebuild some of its lost chemicals and fertilizer industry. 

 

This cannot await a late autumn budget. Every day we send out a high tax anti business message more investment will be delayed or diverted. All the time we continue with current policy a sharp slowdown or a complete stop to growth is inevitable. The Uk deserves better and can do better. Now is the time to set out a bold strategy for freedom and growth. If we do this the voters will return. We need a new Conservative way forward.