Author: johnredwood

In the 1970s when as a young man I first became critical of nationalised industries, I identified there main features of them I did not like. They were bad for their customers. They usually overcharged them, with high rates of price increase. They failed to innovate or hit high standards of customer service. They were bad for their employees. You had a high chance of losing your job if you worked for the nationalised steel or coal or rail businesses, as they went through redundancy programme after redundancy programme. They were bad for taxpayers, as they racked up huge borrowings and losses which required taxpayer subsidies and write offs on a large scale.

The current nationalised business which comes closest to some of these features today is the nationalised provision of roadspace. It is a monopoly supply, provided mainly by Councils with the biggest and most successful roads supplied by the national government. They are provided free at the point of use, but there are huge charges on motorists who pay many times over the cost of the provision through special taxes on motoring. The cost of provision for taxpayers is also high. The monopolist rations the supply, creating congestion and inconvenience. The Highways executives often occupy the road for weeks on end for improvements or alterations, and do not seem to have a sense of urgency in getting roads back into use. Some of the works they call improvements intensify the congestion and sometimes pit different kinds of road users against each other in unhelpful ways.

This year has seen misery about potholes, where some of the local highways authorities have been slow to respond to money available for pothole filling, and slow to respond to the general public mood to improve the quality of the surfaces. Potholes are particularly trying for cyclists. Let’s hope local highways departments take up Mr Grayling’s proposals to put utilities away from the main highway, to build better local strategic networks, and to tackle congestion more vigorously.

The UK may want the EU summit to be about that post Brexit relationship, but much of the time will be taken up with the rest of the EU trying to stitch together a new migration policy. That will be followed by a meeting of the Eurozone Heads with Germany wanting to reinforce the austere disciplines of the scheme against possible challenges from Italy and others. The rows over migration may make the issues over the Euro more intractable and fractious.

When the PM is allowed to put the UK case I want her to be strong as well as her usual courteous and helpful self. She should say the UK negotiators have been more than generous so far in responding to EU demands for money we do not owe, and in potentially accepting powers and controls we do not have to accept during a possible transition. In return the EU now needs to offer a comprehensive free trade agreement for goods and services which leaves the UK free to spend it own money, make its own laws and conduct its own trade policy. If the EU rejects any such suggestion then the UK should simply leave on March 29 2019.

The public have rightly shrugged off the latest round of Project Fear statements. Airbus has no wish to try to sell planes without wings, and is not about to substitute Chinese wings for UK ones. There need be no queues of lorries at Dover or other UK ports once we leave. The UK will control those borders and will use the electronic and advance filing systems we already use for our trade to avoid needing to calculate customs dues whilst the driver waits at the border.

There hasn’t been a new Project Fear worry for some time. The Remain media just seem to like recycling old materials time after time, with no particular purpose.

Yesterday I gave my second lecture on the delivery of public services, following on from the All Souls lecture providing analysis of the different ways public service is delivered in the UK. Speaking at the IEA I reminded people of my main findings. Bread and circuses are as much public services as water and broadcasting, or health and education. The most common way of delivering public service in the UK is through numerous competing private sector for profit companies charging consumers the economic price of the good or service. The private sector plays a large role even in services that some think are truly public sector. The NHS for example has many GPs who are small business contractors, and uses medicines entirely supplied by for profit companies.

I stressed the importance of choice or competition to achieving improvements in quality and reductions in cost. It was the introduction of competition into electricity supply that lowered prices following privatisation. It was competition which powered big improvements in service quality and technology in UK telecommunications. It is choice of free school places which helps progress in local schools and gives parents and pupils some leverage where a school starts to fail.

I wish to see competition introduced more widely in the water industry where it would encourage lower prices and better provision. I want to see more competition in the provision of rail assets and services. Newly united track and train companies could have to offer capacity to third parties wishing to run services on their lines subject to an independent arbitrator over terms, and more should be able to put in new capacity as a challenge to incumbents. Quality and efficiency are not enemies, but opposite sides of the same coin. Both are driven more effectively by competition.

Offering a service free is fundamental to the UK’s NHS and to the provision of school places. We need to make sure, however, that the taxpaying user of the service is not powerless to require good performance or to change arrangements just because the state pays rather than the individual directly. There needs to be sufficient capacity to allow people to change school or doctor if they wish to do so.

In some other cases offering free public services can provide unfair competition to the private sector. The BBC website makes it difficult for competitors to charge for similar news and cultural output. Some Council leisure facilities prevent private sector competitors or damage private facilities already established.

Owning assets in the public sector has the advantage that the state has access to huge sums of capital at low interest rates. It has often in the past overspent on the assets and managed them badly, offsetting the gains from relatively cheap capital. There does need to be capital discipline when using the freedoms having your own printing press and bond factory allows. The danger is single channel decision making. If the state owns telecoms for example, and makes the wrong call on technology,the whole country is affected. That is exactly what the nationalised industry did in its last decade, when it fell further and further behind the USA.

Parliament yesterday voted to approve the third runway at Heathrow. This is the third of the three Hs of large scale infrastructure investment that this government has decided on. It is the most commercial of the three. Hinckley may lumber us with 5o years of very expensive power, unless the alternatives suddenly shoot up in cost . HS2 will be a huge loss maker for years to come on any sensible forecast. It is a disproportionately expensive investment for the railway as a whole, and will hit the revenues on competitor lines. Heathrow will be a successful hub airport with many people and airlines wishing to use it.

The issues surrounding Heathrow were not easy. Some felt expansion at Gatwick would be better. Some wanted a distributed system of growth with several airports in the south east expanding to take more flights, on the argument that hubs and interlining are not as important as some claim. Some wanted the lengthened two runway solution at Heathrow, to cut costs. Many of us want some better news on noise. Because the UK has developed an airport so close to a large conurbation it has created more strains between the settle population and their noisy neighbour. Having the airport to the west of London means planes cannot be stacked over the sea, which would reduce noise and risk.

There was general agreement that the UK does need more airport capacity in London and the south east. There is universal agreement that more direct flights to other UK cities would be helpful, reducing the strains on Heathrow with people flying down to London to catch an onward flight to somewhere else. This is mainly a question of getting to critical mass in these other cities to sustain a decent direct service.
I urged the Transport Secretary to intensify efforts to reduce current levels of aircraft noise, reminding him of the agenda of measures I have been working on with the Aviation Minister.

Mr Trump regularly condemns the German car industry for selling too many cars to the USA. He thinks it unfair that there is a 10% tariff on US cars into the EU but only a 2.5% tariff on cars into the USA. Surely it would be better and fairer if the EU removed its tariff completely or took it down to a relatively unimportant 2.5%? The US has opened a formal S 301 review of car trade and will doubtless find that there are trade problems that need to be remedied.

This part of the trade war is not yet fully joined. The USA are still busy trying to get decent reform from China, where trade terms are skewed in China’s favour and where China allows abuse of intellectual property. This set of actions followed a comprehensive report into China’s handling of IP under a S 301 enquiry. China has promised more enforcement of IP protections, and more market opening. This will benefit the UK as well as the USA, as under WTO rules China has to offer the same improved terms to all members.Now Mr Trump is talking about a 20% tariff on EU cars anyway

If the EU accepts Mr Trump’s case about the lack of fair trade in cars then that means the end of the 10% tariff for all WTO members. That too will be a good outcome for the UK as we leave the EU. The sooner we are free to wield vote and voice for fairer and freer trade the better. This is a time of change for world trade where the UK could make a great contribution to reform. The WTO has made clear that there is a vacancy for a substantial country to lead the case for freer trade within the WTO framework. They point to substantial gains anyway fro m last year’s Facilitation of Trade Agreement which they think will cut costs of trade substantially.

Mr Trump asks how it is that the US has a massive trade deficit and Germany and China have massive trade surpluses. He points out that the US has many fine companies with great technology and great skill levels . He thinks the terms of trade are unfair, and need amending.

The UK too has a large current account deficit. Part of this comes from  the substantial EU contributions and overseas aid we pay out. Stopping the EU payments will reduce our deficit by around 15%. The EU has always done more to open goods markets where Germany is strong, and less to open service markets where the UK is stronger.

Mr Haldane’s decision to vote for an immediate interest rate rise this week shows the Bank remains split and uncertain about its forecasts. They are still trying to get over their hopeless forecasts of recession in 2016-17 which was never likely. As Chief Economist he should understand that the tough actions of the FPC of the Bank have slowed credit and activity substantially over the last year. Money growth is very sluggish.
The car market has been brought down by withholding perfectly safe car loans from potential buyers.  The decisions they took to cancel commercial bank facilities, to raise rates by 0.25%, to restrict consumer  credit, and to toughen mortgage criteria have all played their part in slowing the UK to just 0.1% growth in Quarter 1. Quarter 2 will doubtless be a  bit better, but they should not be thinking of more monetary tightening until quarterly growth gets back up to 0.6% or more. There is no likelihood of overheating given current levels of growth and sluggish money and credit. The slow performance in Q1 was not just weather related but points to the effects of policy actions taken. The Treasury has reinforced these problems with their tax attack on Buy to Let and higher priced properties in the 2016 budget and their tax attack on dearer cars in the 2017 budget, along with the general policy moves against diesels.

Some say there is a bit of wage inflation around. It is true the government has boosted low end wages through its Living Wage policy. It is to be hoped that low end wages will rise a bit more as employers compete for labour. It is also  be hoped that firms invest a bit more so the people they employ can be more productive, earn higher wages, and see machines do more of the routine work. The Business department who spend a lot of time agonising over what might go wrong for the car industry when we leave the EU should get on with the day job, defending the car industry against domestic policy changes that clearly damage output whilst we are still fully in the EU. Why have they not spoken out about the bid drop in diesel sales?

The BBC want to peddle myths about austerity. On thursday I heard the World at One programme devoted to telling us there had been a big austerity drive in the public sector since 2010. They used the old Treasury figure that 80% of the adjustment to get the deficit down was made by public spending cuts, and 20% by increased taxes. The entire programme was devoted to this thesis, without any cash numbers for either revenue or spending being mentioned throughout!

So let me have another go at explaining what actually happened.  There was a huge increase in tax paid which cut the deficit and allowed some increase in total public spending. Most of the tax rise came from growth in the economy, with some help from lower Income Tax rates. Judged by the numbers 100% of the deficit reduction came from more tax revenue. Of course some individual programmes were cut, but overall spending rose substantially in cash terms. The benefits bill is well up despite a good fall in unemployment. Health and education, large spending programmes, were protected from reductions. Payments to the EU and in Overseas Aid went up substantially.

In 2009-10 the state spent £669.7bn on current and capital public spending. it raised just £490.3 bn of this in tax. There were some additional receipts, leaving borrowing of a massive £156.4bn

In 2017-18  (Budget figures) the state spent £795.3bn. That is £125.6bn more than in 2009-10, a cash increase of 18.75%, a bit above inflation.

In 2017-18 the state collected a massive £692.8bn in tax revenue, an increase of £202.5bn or 41.3% above 2009-10 levels. As a result state borrowing fell to just £39.5bn, again after allowing for some other receipts.

In other words the deficit came down thanks to huge revenue increases.