Author: johnredwood

According to the Times someone in the Treasury thinks the UK could be a lot worse off outside the single or internal market. They have put some more figures into the Times that make some bits of Project Fear look quite modest. What is the point of putting out silly figures that bear no relationship to the current reality of the UK economy? Why suggest the UK will be in a weak position when we leave the single market, when it is more than likely the rest of the EU who has much more to lose than us wants to keep good access to the UK and therefore has to continue with our good access to them. We now know the Treasury figures for the short term impact were wrong, so why trust their longer term numbers? With or without a special deal with the EU the UK will have good access to the EU’s internal market, on terms as least as good as every other non EU country around the world does.

As people shouted out in one of the public meetings I spoke to during the campaign when the Remain side used their Project Fear figures “We don’t believe you”. These numbers are bad economics and even worse politics. The UK needs to show a united and confident face for the discussions over trade with the rest of the EU.

There is a notable anti big business mood in the advanced world’s political winds. In the USA both Mrs Clinton and Mr Trump wish to see major changes to the behaviour of large corporations. Mrs Clinton wants to regulate them more, intervene more in health care, and tax them more. Mr Trump wishes to limit their access to cheap migrant labour, and proposes a big tax reform which he hopes will combine lower rates with getting them to pay more and to repatriate offshore cash.

The EU is ever keen to regulate them further . It has already put through controls on bonuses in the financial sector, numerous rule increases on banks, and a blizzard of new laws on everything from the environment to employment. Both the EU and the US authorities are keen to increase tax revenue by tightening tax rules, and keen to fine businesses for wrong doing as another source of revenue for the government.

In the UK the Labour party has moved strongly against companies and capitalism generally, proposing a range of new controls, interventions and nationalisations. Mrs May has been the most balanced of all these actors and actresses, but she too is saying that companies that misbehave over employment or tax should expect tough treatment from the state.

So what has business done wrong? Big business has allowed spectacular failures to disfigure its central contribution to progress and better lives. In an era when business has delivered us the internet, mobile communications, better personal transport, a range of labour saving devices for the home and office and record living standards, there has been a steady drumbeat of disaster or dubious practises from some corporations. We have witnessed the oil spill in the USA, the emissions scandal from VW, employment issues from some UK retailers, pension problems at BHS, tricky tariffs from utilities, lack of customer awareness and a financial crash from banks,and poor broadband in various locations. This has been made worse by a perception that a gilded business elite of executives who do not own their companies think they have the right to huge seven figure sums in remuneration just for being good at corporate politics. They enjoy over the top pay without necessarily delivering the better service or product for customers that might deserve such fabulous rewards. Much of the drive to better and new products and services comes from exciting challenger companies run by people who own and run entrepreneurial businesses.

The public does distinguish between entrepreneurs and company executives or corporate politicians. If someone risks their own money and reputation and builds a big business, they can enjoy great income and wealth as a result. It is someone who is good at corporate climbing, who inherits the success of past generations of executives and shareholders, who needs to exercise some pay restraint and to put the needs of customers and shareholders first before their own vaunting financial ambition.

Changing this culture without driving jobs and business away is not easy, but it is a necessary task. I would be interested in your ideas on what should go into an industrial strategy.

I find I have to spend a lot of my time explaining why so many of the conventional views, pumped out by the establishment institutions in the UK, are false narratives. I am going to do an occasional item on these.

The latest false narrative is that the pound has fallen owing to Mrs May’s decision to go for “hard Brexit”. As many of us have explained there is no such thing as hard Brexit. Vote Leave made crystal clear we would leave the single market when we left the EU as they are part of the same Treaty, and the continentals see freedom of movement and budget contributions as a key part of the single market. It should therefore be no surprise to markets, several months later, that we will be leaving! The issue was and is what access we will have to the single market. Again it is quite obvious we will have decent access, as they need decent access to us. I think we will get tariff free access, but if they want WTO level tariffs they will suffer much more than us, and we will get a boost of substantial tariff revenues on all our imports of manufactures from them which we could spend on other economic improvements at home. Services are of course tariff free.

The pound fell sharply on Thursday. This was four days after Mrs May made her wrongly named “hard Brexit” speech. If the cause of the fall was the market’s ignorance of the obvious until she spoke, then surely the fall would have occurred on the Monday immediately after the speech?

Today I want to just remind you of some of the main false narratives and their accompanying soundbites, that have distorted our public debates in recent years.

In the first decade of this century the government assured us they had found an end to “boom and bust”. No matter how hard we tried to explode this nonsense, it was commonplace as a view. This complacency lay behind the egregious errors made in allowing banks and government to rack up huge debts which proved unsustainable.

Throughout the Brown and Coalition years we were told that the Bank of England is independent. I have recently produced a couple of articles on this site showing what nonsense that was and still is. The Bank was very politicised through much of the period 1997-2016 and subject to several changes of direction from government and Parliament instructions.

During the crash the Labour government successfully blamed the banks for the crisis. Whilst some of the commercial banks made bad judgements or misbehaved, the largest errors were errors of central Bank and Treasury policies, deliberately bringing solvent banks down through starving them of liquidity, and refusing to use bail ins and other techniques to resolve their problems.

The Coalition economic strategy was characterised as cutting public spending to eliminate the deficit in a Parliament. 80% of the work of deficit reduction was said to be spending cuts. Yet every year real spending rose a little, and the government relied on large tax revenue increases to pay for the extra spending and get the deficit down. They fell well short of eliminating the deficit in the Parliament.

The Opposition always characterised everything the government did as austerity policies, yet the areas of cuts were relatively modest. It is true some of the welfare cuts were ill judged and allowed a more general narrative to be written which was not true. Meanwhile spending on pensions, welfare overall, EU contributions, overseas aid the NHS, education and others went up. Nothing was attempted on the scale of the damaging cuts in Greece, Ireland, Spain and Portugal under EU controls, where big reductions were made in spending. The left in the UK never seemed too keen to condemn these.

Now we see the false narrative that everything that goes wrong is caused by the Brexit vote, and everything which stays good just means we have not yet seen the impact.

Yesterday’s letter from the CBI was a general cry from the heart that they might not enjoy the influence and access to government they think they ought to have. I suspect they will find with the new government much as they have with other past governments that they will have access to put legitimate points about the business interest to the Ministers and Ministries that tax and regulate them. It should be a professional relationship, not a special friendship.

The CBI has often provided pro EEC/EU advice that has turned out to be very damaging to the UK economy and business interests they claim to represent. I took the large industrial quoted company I led in the 1980s out of the CBI because it insisted on campaigning vocally for the UK to join the European Exchange Rate Mechanism. I was one of the few critics of the scheme. I pointed out the UK would get a high inflation or a nasty recession from membership. I lost the argument to keep us out, and we ended up getting both the inflation and the recession. That deeply damaging economic policy closed many factories, bankrupted businesses and meant the Conservative party spent 13 years out of office and 18 years without a majority. The government should remember the downside of some CBI advice.

I remember having an open door to the CBI and to their member firms when I was the UK’s single market Minister. I had the task of “completing” the single market in the early 1990s, when we had to put through a huge legislative programme of almost 300 new business laws to carry out what the EU thinks is a single market. Many businesses came to lobby me. Practically every time they came, they either wanted me to delay or dilute the proposed measures. Often they would have preferred me to veto it, but I had to remind them we no longer had that power under the terms of the Treaties we had signed with their encouragement.

One of the worst examples of a bad proposed EU measure was the one that would have made the London Stock Exchange’s method of trading illegal. The Directive had been drafted based on continental methods of trading. I went to great lengths to get that proposal changed, including going to Brussels to attend the working meeting of officials myself as well as to the Ministerial meeting. I managed to get the draft changed. Having no veto made this difficult.

Now I advise the CBI to recognise that the biggest threat to London’s financial business is the proposed takeover of the London Stock Exchange by German shareholders. Whilst they will offer short term reassurances that business will still be conducted in London, there will be nothing to stop them shifting large quantities of business to Frankfurt later on. Why isn’t the CBI highlighting this and lobbying to block the merger on competition grounds, as it will clearly reduce competition in European financial transactions.

It is curious that many of the laws that are what they call the single market were thought to be damaging to business at the time they went in, but are now apparently thought to be crucial to business. I would like to reassure the CBI that if they like all these laws now, we could always decide to keep them once we are out. The good news is that once out we can keep them, repeal them or improve them as we please. Where the laws are narrow matters of standards and requirements for the continental market then of course exporters will still need to meet the customer demands, just as they have to meet the different ones for US or Asian exports.

I have a simple answer to the government on seeking advice on Brexit.
They should not seek advice from consultants who were urging us to stay in until June 23rd, who want to charge the taxpayer a lot of money for their advice, and who have not read and understood the many documents which have established the EU.
The task is much easier than many of these wannabe consultants want us to believe. The PM has made clear we are taking back control of our laws and our borders. We also need to take control of our money. This means none of these things can be negotiated.
There are two simple ways of trading in the future. We can carry on as at present tariff free. This is obviously the right answer for our partners who sell us so much. If they want to damage their trade with us, then we can trade under WTO MFN status.
There are various people who have read all the necessary documents, who believe there is a good way through for the UK and who will provide their advice free. I suggest this is what the government accepts. Some of us have recently published a blueprint through Legatum, which covers all these issues and offers a strong negotiating strategy on trade to maximise the chances of a happy outcome and to speed it up to remove the uncertainties.

The extraordinary resignation of a recently elected leader, and the much debated dispute between two MEPs, has created much media interest in who might both win the leadership and then do the job. As some enthusiastic UKIP supporters regularly write in here I am offering them today the chance to tell us who they want and what they think about their leadership contests so far. It would also be interesting to hear what they think the role of the party is now we are leaving the EU. I am not looking for a blow by blow account of any physical contact between the two MEPs, but I and other readers here would be interested to know what the main arguments are that are clearly generating passions amongst UKIP members generally.

I see today the CBI are worried about their relationship with the new government. I wish to make it clear that I fully support Mrs May’s view that some businesses have to improve the way they behave. Many of us have been concerned by the behaviour of some senior business people towards their employees, and by their view of how much money they should take out a company they do not themselves own. I will write at greater length about various aspects of government and business in the next few days.

The myth of Bank of England independence is not just wrong, but it is also damaging.

By calling the Bank independent, people want to endow it with an authority and wisdom that it often does not possess. The false narrative implies that all politicians and the Treasury some of them lead is by definition biased, foolish, unable to make good judgements. In contrast the politics free Bank as an independent can make accurate and uncluttered judgements for the greater good.
The underlying assumption is the Bank employs special experts who are uniquely qualified to predict the future course of the economy and to make well informed and well intentioned judgements about it. Every one of these assumptions should be subject to challenge, as they are all wrong.

The Bank has been “independent” since 1997. Over that time period its economic forecasting record has been no better than the typical private sector average, which it often sticks close to. Like most professional forecasters the Bank completely missed the banking crash and great recession until it was in full swing. The Bank on the way to “independence” in the later 1980s was similarly unable to forecast the devastating consequences of joining the European Exchange Rate Mechanism, a policy it actively promoted.

It is difficult to see the Bank is politics free. It shares many of the assumptions of the governing elite and the general economics profession. It plays politics all the time, operating day to day with regular exchanges with the Treasury and wider government. It holds news conferences and intervenes in the political debate, as it did notably in the run up to the EU referendum when it decided to support the losing side. The Bank relies heavily on a concept of capacity utilisation influencing inflation and expectations in a way which is difficult to measure. It is tortured by trying to define the cycle in an age of huge technical changes to products and buying patterns.

I find it difficult to distinguish most of the time between the Treasury view and the Bank view. They usually forecast similar outcomes, and usually agree about the direction of policy. That is a good thing when they get it right, but a bad thing when they make one of their periodic large collective errors of judgement. Where the Treasury and the Bank have disagreed, as over rate cuts during the banking crash, the Treasury was on the right side of the argument.

The truth is there is no magic expertise held by the Bank that makes them uniquely able to set interest rates well. It is a judgement. It helps to study what has happened, and to have some knowledge and experience of what is likely to happen for given changes of policy. The Treasury is as able to do that as the Bank. A private sector forecaster or economically literate business can do it as well. Better policy making results from a clash of views and from open minded study of what a range of experts are saying.

Bank “independence” has coincided with the worst banking crash since the 1930s, with a great recession, and a long period of depressed rates and slowish growth. Is that the best we can settle for?

Constitutionally the Bank is the creature of Parliament. In recent years Parliament stripped the Bank of major powers in the late 1990s, whilst giving it more independence over settling interest rates. After the 2010 election Parliament gave back important regulatory powers to the Bank. Any so called independent power the Bank enjoys it does so only for as long as it pleases Parliament.

In practice the Bank has to accept the instructions and judgements of the government. All the time the government commands a reliable Parliamentary majority the Bank accepts the guidance and views of the Chancellor. Sometimes these are formal and published. For example Mr Brown changed the role and powers of the Bank by Statute, and he altered the inflation remit which controls the MPC during his tenure. Mr Darling overrode the MPC rightly during the banking crash and forced them to cut interest rates more quickly than they were planning. Sometimes the influence is behind the scenes. There is often a happy conjunction of incorrect forecasts between the Bank and the Treasury. The Bank took a similar line to Mr Osborne over the short term consequences of a Leave vote. It appears that the Treasury,OBR and Bank work closely together and often share the same judgements. Were there to be big divergences it would become a matter of controversy.

The government and therefore Parliament has kept to itself the power to approve Quantitative Easing programmes. This is a crucial power to reserve at a time of near zero interest rates. It means that even the devolved independence of the Bank on interest rate setting is constitutionally very constrained, as QE is clearly the major feature of current monetary policy. The latest burst of QE was formally approved by published letter from the Chancellor. Parliament could at any point debate and vote on these matters, but so far has been happy to approve what successive Chancellors have agreed on QE. I am pleased to see the PM is of the view that we do not need more QE, something I have urged here.

A lot of outside commentators misunderstand the powers of Parliament. Leaving aside current EU obligations which do constrain Parliament, Parliament is free to debate and vote on whatever it likes, and to change the law affecting any institution or policy it wishes. This includes whatever the Bank does. So it must be in a democracy. Ultimately the Chancellor should get the credit for economic policy success, or the blame for failure. The electorate can dismiss him at an election, not the Governor of the Bank. The fact that Parliament has chosen in recent years to allow the Bank to set interest rates, and has on the whole not been critical of what it has done does not mean the Bank is independent. It is accountable directly to Parliament, but more importantly it is mainly accountable through the government to Parliament. On two crucial occasions in the past Chancellors have intervened directly in the interest rate setting process itself, and those are the ones we know about. Maybe now it is time for Parliament to be more critical of its Bank, as its present policy of QE and ultra low rates is driving the pound down too much and undermining savers.