John Redwood's Diary
Incisive and topical campaigns and commentary on today's issues and tomorrow's problems

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Boosting supply to ease the squeeze and lower inflation

The UK is short of oil and gas from domestic sources. In recent years we have come to rely more and more on imports of gas and oil, despite having more reserves available at home. During this next decade when we still need plenty of gas for home heating and industrial processes, and plenty of oil for transport and petro chemical activity there is a good case to extract more of our own oil and gas. The understandable wish of the west to remove Russian oil and gas from supply chains adds more impetus to the need to reduce our use of imports.

Those who are most concerned about the output of CO2 need to accept that if we substitute domestic gas supplied by pipe from a UK field we will greatly reduce the CO2 output compared to importing LNG gas which requires energy to compress, transport and decompress it. The Treasury would be delighted as home produced gas means a big tax bonanza for UK state instead of passing huge sums of money over to foreign governments and companies for the imports. Anyone keen to promote more better paid jobs would also welcome it, as the oil industry does usually pay well and we would have more of these skilled ,jobs in the UK benefitting our citizens and tax collectors.

Ministers have announced that they do wish to see more UK gas produced as a transition fuel here at home. Today I ask will the Regulators and officials press on with a greater sense of urgency? Where are we with the potential of Cambo, Rosebank, Bentley, Finlaggan. Jackdaw, Lancaster fields and the others that could be speeded up? What scope is there to accelerate production from fields that are up and running already? Where have we got to on the possible reopening of the Rough storage facility?

At a time when the EU is facing rationing and a difficult future without Russian gas  the UK could assist by producing and investing in more production in its own oil and gas fields.

 

Too many people draw lessons from the 1970s without studying its history

 

 

 

It is strange to read and hear unquestioning assertions that the high inflation of the mid 1970s was the result of Chancellor Barber’s ¬†tax cuts. If you study the history you would conclude that the Barber period did indeed see an inflationary price bubble especially for property and financial assets, brought on by a change of money policy.
The Bank and Treasury in 1971 gave up on a complex system of quantitative controls on bank lending, substituting Competition and credit control as a policy. The deregulation would have been a good idea if the Bank had then used its retained powers to fix short term rates in a way which limited overall credit and money creation. Instead they went for a credit and money boom which powered the property and secondary banking bubble. In 1973 with clear overheating they abruptly changed policy just in time for the blow of the oil price OPEC surge to widen the inflation and add to the downturn their money policy lurch generated.

There are some similarities with today. Today the Bank has lurched from far too much money creation and low rates to money destruction and higher rates, just as in the 1970 s the Bank and Treasury lurched from far too much private lending and low rates to too little. Then as now the asset inflation broadened out into a general inflation  pushed hard by an external energy price shock. These external  shocks pushed up the inflation rate but also took demand growth out of the domestic economy leading to recession in the 1970s. Today we will have a recession if we persevere with higher taxes and a severe monetary tightening at the same time as the real income hit from energy.

The Bank tries various sets of forecasts

After the collapse of its famous 2% inflation forecast for this year the Bank has gone over to providing a range of forecasts. These at least accept the uncertainties of the world and the difficulties of accurate spot forecasts. On one of their scenarios inflation tumbles well below target over the  next two years and on their base case after inflation yet again higher for longer than past estimates, it too subsides to target in two years. On all of the scenarios there is a big hit to real incomes and GDP from the fourth quarter of this year.

The Bank makes it more difficult for itself in¬† forecasting by assuming no fiscal policy changes and assuming no new shocks in either direction. The Bank’s mandate is primarily to keep inflation around the 2% CPI target, but it also is required to take growth and employment into account. The Bank’s rationale for tightening money policy so much that a recession is likely is that they need to stamp hard on the inflation now to stop it running away with them. They are right to want to arrest any wage/price spiral. If they look at the data there is no sign of that¬† happening, with wages lagging prices by a wide margin leaving many more people worse off. This is likely to be followed by falls in inflation as a result. The inflation in the UK has been delayed and extended by the energy price controls which mean there is more bad news to come this autumn when the price cap is lifted again.

Markets expect the Bank to carry on increasing rates this year all the time there is still plenty of inflation around, but expect them to have to cut again next year as recession sets in. It is a depressing boom/bust policy all over again. The Bank fails to forecast big issues ahead, follows the wrong path, then corrects retrospectively. It should instead be looking ahead more. The  main problem is shifting from inflation to recession at the  very moment the Bank wakes up fully to the inflation.

In May 2021 the Bank forecast 2.3% inflation for Q2 2022  and 2.0% for Q2 2022 with rates at 0.1% then 0.3%

In August 2021 the Bank forecast 3.3% inflation for Q3 2022 and 2.1% for Q3 2023 with rates at 0.2% and then 0.4%

Memo to an incoming PM Changing the Downing Street organisation

Under Boris Johnson the size of the Downing Street and Cabinet offices expanded. Each time Boris was persuaded that the centre was not working as it should nor serving him well he would add additional people. It became increasingly difficult to know who under the PM was in charge, who was responsible for any given policy or problem, who might write the  brief for the PM or who might follow up any PM decision and get action from Whitehall once decided.

The simple structure under Margaret Thatcher rested on three senior officials, the Principal Private Secretary, the Head of Policy and the Chief Spokesman. Each of us knew the PM’s mind on things we were handling and each of us made sure in our spheres of action that any wish or decision by the PM was put through the proper Cabinet and Cabinet Committee procedures or referred to the responsible department for decision and action. As Head of Policy I made sure the PM had personal briefing on the major issues coming before her from Cabinet and from inter departmental correspondence analysing problems from a Head of government viewpoint to see if they were in line with strategy and made sense in the light of the government’s other objectives.

Number 10 today has a Chief of Staff, a Permanent Secretary, a Principal Private Secretary, three Deputy Chiefs of Staff, a  political Head of Policy and an official Head of policy, a Cabinet Office Minister of State and various other senior officials. The Cabinet Office has expanded its roles with a Permanent Secretary as well as the Cabinet Secretary who used to run it. Clearly many of these individuals  cannot always be in the room when the PM considers or decides something. There is  no clear structure of who should brief the PM on an issue, attend the meeting and organise the follow up.

The incoming PM would be well advised to slim the structure down and appoint a handful of senior people they trust, with a working plan to ensure that every meeting matters, every meeting with an outcome is properly recorded, and every issue the PM wishes to pursue is properly followed up. The PM also needs to take more control of the diary. Time is the most precious PM commodity. How it is allocated will help determine what gets done and what is important to the government.Slimming Downing Street would be visible proof of the wish to run a leaner and more effective government machine more generally.

Independent Regulators need scrutiny

The public regard Ministers as responsible for many things, including areas where independent bodies have been given wide ranging powers. The independent Bank of England is responsible for keeping inflation to 2% but the public blame the government if inflation takes off and nothing appears to be done about it. The recent failure of U.K. monetary policy to keep inflation around 2% was entirely predictable and was the result of policy error, allied to a bad economic model of the economy and very optimistic inflation  forecasts from the Bank and Treasury. I have commented often on the troubles of too much money creation. Today my case is errors by other Regulators  are all too common. The government will be blamed for what they do wrong. All of them are creatures of Parliament, with management appointed by government and their costs underwritten by taxpayers.

Let ‘s take the case of the Water Regulator. Ofwat controls profits, prices and investment programmes. There has been recent justified criticism of too many dirty water discharges into rivers. You can blame the companies, but they would argue financial controls limit the amount of investment in additional capacity they can put in.The solution to dirty discharges is large spending on bigger pipes to handle growing volumes, which requires regulatory approval of the additional money needed to pay for it and of the physical works.

The water Regulator also helps limit the amount of additional capacity there is to treat and store clean water. Despite high levels of inward migration which argues for substantial extra capacity there has been a reliance on the stretch from old reservoirs. As a result whenever we have a dry season the industry has to dust down rationing plans . Water is the ultimate renewable resource, passing from rivers to sea and recirculating through rain. The U.K. Water Regulator has not served us well over quantity of water supply and over cleanliness of water returned to rivers.

The Electricity Regulator and grid led system keeps us very short of domestic generating capacity. It means we are stupidly dependent on an energy short EU to bail us out in times of high demand and or poor supply. The Regulator has also presided over the bankruptcy of too many electricity supply ¬†companies, landing taxpayers with a big bill for the largest that went under. Doesn’t ¬†this warrant a review? We could do with more private investment in providing reliable power from domestic sources, and reassurance that there will not be future large bail out bills.

The Regulator of Offshore oil and gas has interpreted their brief as rapid rundown of the  U.K. North Sea in pursuit of net zero targets. Unfortunately this just means we import more gas from abroad which costs us far more and entails the production of more CO2 than burning our own. There are now indications of a welcome change of approach. Gas is a crucial transition fuel this decade. We need to do far more to produce our own at a time of gas shortage and the use of gas as a weapon by Russia. A good new policy will bring more U.K. private investment and more better paid jobs.

 

Memo to an incoming Prime Minister Broadcasting and the digital revolution

The BBC and Channel 4 are  being outpaced and outgrown by Netflix and Amazon, Disney and Apple as people  seek their entertainment from downloads rather than tuning into the same scheduled programme as their  neighbours. As a result the budgets of these large corporations to commission films and seek new content are much larger than the UK state institutions. The traditional media are finding it difficult to hold their audiences.

Channel 4 should be sold to new owners. It needs to seek new capital to expand and needs new direction to compete successfully in this multi media world, with audiences beyond one country. I favour giving employees in C4 some shares in the organisation on sale so they have a stake in the business going forward and a greater  sense of alignment of their interests with those of the new dominant shareholders or owners.

The BBC has a well known brand in many parts of the world and has some global reach in both tv and radio. It is being held back by dependence on Licence fee funding. More and more people are dropping their licences by not having tvs at all and not using BBC services, whilst the cost of competing for talent and new material is rising on a global stage. The BBC does need to look for additional revenues from selling its services outside the UK on a global scale. It does not help itself by its systematic global establishment bias and wokish preoccupations. The U.K. competition authorities need to watch to see if BBC subsidised services are preventing competitors emerging or flourishing.

Memo to an incoming Prime Minister Social care

There is no easy answer to the complex problems of social care. Nor is there any cheap fix. One of the problems governments have found in proposing changes of policy is many people do not understand the current rules over social care especially for the elderly. Many families never find out, as their relatives die whilst still  living at home.

Many elderly pensioners continue to live in their own homes,paying for their accommodation and food out of their pension income and any accumulated savings. If their income falls too low then the state helps out with benefits. They qualify for free care from the NHS for all their medical needs. If they need assistance in their homes with everyday living they may qualify for free social services or they may need to pay for support.

If an elderly person needs to go into a home then the state pays if they have little or no capital, but the elderly person pays if they have money of their own. This includes selling their home which they  no longer need and using the proceeds for the care home which they now live in. If their home is still needed by their husband or wife then it does not have to be sold or taken into account. In a  care home they get full free NHA medical care  but have to pay for social care or claim it under the rules from the local authority. They of course pay for their board and lodging all the time they have the  cash.

Some people think this is unfair. They think social care – helping with shopping or dressing or whatever – should be free like health care for all. Some think it is unfair those who worked hard and saved more have to pay themselves and those who didn’t have free provision. Others argue that the elderly person no longer needs or can use their former homes as they are living in a care home for the rest of their life, so why shouldn’t that money be used to sustain their care and pay their food and accommodation bills?

It is clearly the case we all believe those in need of care and accommodation without money should be helped by the state. The issue is how many universal benefits should there  be. If more, which taxes will pay the bills? The social care tax put in by the outgoing PM and Chancellor will pay a small proportion of the total costs involved and is already dwarfed by the public cost of NHS treatment and care home costs for the elderly which the state meets.

Memo to an incoming Prime Minister Public spending does not control itself

The role of Chief Secretary needs strengthening as the Treasury’s second Cabinet Minister. Working for and under the general direction of the Chancellor the Chief Secretary needs to probe and challenge the bids for additional funds and the way in which existing budgets are¬† being spent. He or she should be the voice to greater efficiency and better¬† value for money in everything government departments do.

The need to rein in public spending without damaging main services is obvious from the figures. The first target should be the huge welfare budget, where we need to replace more benefits with work incomes so people are better off and taxpayers save money. It is good to see people  now rejoining the workforce after covid. There is plenty more room to help people find appropriate work for their skill levels and health circumstances to reduce the welfare  bill.

The second target should be to ensure better value for all the extra money going into the NHS.  That requires  the Health Secretary to work with the management to improve effective working and help employees deliver more with the right training, computer and automation back up where that can help. The phase out of special covid expenditures helps.

The third issue to examine is the capital cost of providing housing and public service provision for economic migrants. It might be better to reduce  numbers granted work visas and do more to develop our own workforce, as making provision for new arrivals is expensive given the amount of capital sunk to support everyone of us already settled here.

The fourth issue is to assist UK businesses to make and produce more at home. This will help generate more jobs and assist in delivering more tax revenue

Memo to an incoming Prime Minister It’s not the amount of money you spend that counts

Sometimes the outgoing government has adopted the Labour approach to public services, defining them by the amount spent. This says if I spend extra on a public service it will be better than if I do not. People are told they should be grateful whatever the actual level of service because a service is so expensive. A Minister faced with a public service problem reaches for the cheque  book when it may need intervention over how the existing money is spent and the service is managed.

When I go shopping I do not seek to maximise the cost of what I buy. I do not automatically assume dearer means better. Sometimes the cheaper shop or the cheaper product is as good or better than the dearer. I make judgements of value, fitness for purpose and cost. So shouldn’t we do the same for the public services we sometimes use? Shouldn’t Ministers on our behalf as taxpayers and public service users be the voice for value for money, for quality and efficiency?

The public sector does contract in quite a lot of service and goods supply from the private sector. This can help the public sector by ensuring competitive tenders for the work to be carried out. The public sector needs to be a well informed customer. It needs to be clear about what it is trying to buy with a proper specification. It needs contracts that do not transfer all the risk of non performance to the state. It should not normally be bankrolling any failure by suppliers, though given the size of orders it may need to assist with start up and working capital.

The NHS does not need another top down management reorganisation. It does need a slimming of senior management and of the quango forest that has grown up around our hospital trusts and GP surgeries. Patients will judge the NHS by how easy it is to get access to diagnosis and care, and by how successful the care and treatment is. They will not judge it by how much it costs.

Before agreeing any sum the Treasury needs to establish exactly how the extra money will be spent, and ensure the base budget is also well directed. In successful organisations staff and cash resources are routinely switched from areas no longer in such demand to new pressure points. There is a need for continuous improvement to boost quality and value for money.

Memo to an incoming Prime Minister Personal journeys begin at school

The gap between the best public schools and the below average state school is still too large. Money does buy advantage. The best state schools show this need not be so. Money does not always buy success. The crucial ingredients of a great school are the attitudes of teachers and pupils and an ethos of can do and self advancement, more than they are a more expensive sports field or smarter and more modern school rooms.

I went to a state primary and won a free place at a Direct Grant school. When I go into one of the great public schools to talk I am usually impressed by the adult approach of the older pupils to any lecture and exchanges we have. They are often keen to find out how I got the jobs and opportunities I had. They will respond to a complex lecture on economics or politics with informed questions and see the exchanges as worthwhile in their own right.

We need to create the same can do and will get on approach in all state schools that have to compete with these institutions. Pupils need stretching. They need to hear there is nothing stopping them achieving good things,  but they also need to be told the people who are the most successful are often the ones that work hardest. In sport the more you practice the luckier you get. In academic life the more  books you read and the more viewpoints you consider the better you are likely to perform. If you want to write well read well.