Author: johnredwood

The Governor mainly seeks to forecast the Bank’s future actions on interest rates. He decided as Governor that his unique contribution to the role would be public forward guidance of what the Monetary Policy Committee might do, so we would have a better understanding of what might happen next. We were told we would have fewer pleasant or unpleasant surprises.

We learned that rates may rise once unemployment fell below 7%. It duly fell below 7% and rates stayed unchanged. It then fell to 4.9%, so they cut rates.

We learned that rates might have to go up once real wages started to rise. Real wages soon after started to go up, but again rates stayed the same and were later cut, against a backdrop of continuing rises in real wages.

We heard that they might have to increase rates around the turn of 2016. Here we are nine months into that fateful year, and rates are now lower, not higher.

They told us there could be a recession or sharp slowdown immediately after a vote to leave the EU. The Bank has now put up its forecast for Q3 after the vote to show some growth after all.

Far from being unreliable, the Bank is remarkably reliable. It is a contrary indicator of what might happen next.

The question we might ask, is why is the Bank so often wrong in its guidance or forecasts?

There are two possible explanations. One is the institution is just bad at it. They made honest stabs at prediction, but lack the Mystic Meg touch.

The other is they got too close to the Treasury and the government’s Project Fear.

It would be good if the Bank would tell us which it was. We are I think due some explanation of the erratic progress of the forecasts. The only way to start getting forecasts right is to admit when you get them wrong and understand why.

We now know the Autumn Statement will come in late November. It will bring us new forecasts from the OBR of how the UK economy may pan out for the last couple of months of 2016 and throughout 2017. These forecasts will have a substantial impact on how much money the estimators think the government will have to spend and how much it will collect in taxes. If they take too pessimistic a view of next year’s growth then the Chancellor will be told he faces higher borrowing than he might like.

My first advice to him is if the forecasts are for slow or no growth next year in line with the pessimism of the Bank of England and some private sector forecasters, he should be very suspicious of the numbers. He certainly need not raise more taxes or cut spending to try to get the alleged deficit back under control, as in all probability this will be a bogus problem brought on by inaccurate forecasts.

I was going to advise him instead to spend or provide tax cuts to the tune of £10bn a year of extra spending and less revenue, the very annual sum we will save each year as soon as we are out of the EU. This will provide a welcome boost, and the deficit will contract again as soon as we cancel the contributions. It would be a spur for the Treasury to be one of those who push for an early exit. You do not have to take 2 years from sending a letter to get out. If you reach an agreement earlier or get to breakdown in talks earlier then you can cancel the contributions earlier.

I think I am still of that view. I would like to see more spent on the NHS and on immediate road, housing and energy schemes as we are short of capacity in those areas. I want to see him scrap VAT on domestic fuel, tampons and green products, though Parliament will have to date the end of these taxes to the exit date from the EU. He needs to cut Stamp duty further, as the last Chancellor’s large hikes have done damage to the housing market and stand in the way of more supply coming on from people who might otherwise like to downsize or change their accommodation.

However, I am also worried by the size of the recent monetary stimulus. Money and credit growth were accelerating before the recent fall in the pound, which in itself is another stimulus. This was then followed by a grave misjudgement by the Bank of England in cutting rates and making available up to £170 bn of created money on top of the money expansion underway. If the money figures remain as fast and alarming as the most recent in the run up to the Autummn Statement then a net fiscal stimulus would not be a good idea. The government should consider removing HS2 from the spending side, as this is a poor value project which could be replaced by better transport investments for the North at lower costs.

Yesterday the Sun on Sunday published an article from me on this topic. I reproduce the blog on it I wrote before the Sun was involved but delayed publishing owing to their interest. This is similar to the article they printed.

I expect the new government to want to increase capital investment throughout the economy. They will be right to order more roads, railway capacity, more power stations, more water supply, more airport capacity and faster  broadband. All these are needed for industrial revival, for better lives, and to keep pace with the big expansion of population that has occurred in recent years.

I would expect this to be done with a judicious mixture of public and private sector money, and with an eye to value for money and to future returns on the investments. Transport, Energy and Business, Culture, Environment and other departments of state will be asked to lift the quality, reduce the price and increase the capacity of the utilities they supervise or own. That is the easy bit.

Before they can get far with any of this, there remain three large legacy projects from the Coalition government which they need to determine. All are contentious, all are very expensive, and all still rest to be finally decided. It is a sign of their difficulty and the state of UK government managing large projects that none of them have been signed off despite ten years or more of study and debate.

Each one is at a different stage of development. In the case of the proposed expansion of Heathrow, it falls to the new government to decide finally if extra southern airport capacity is needed, is desirable, and if so where it should be. I cannot offer a conclusion on this, as we still have not read the long and detailed report and evaluation the Coalition  government commissioned. As a constituency MP I wish to see a better response from NATs and Heathrow to the growing complaints from residents in my area following changes to routes which were not consulted on.

Hinkley Point is a difficult case.
However, the new government had every right to review, and the contract was not signed when they took over. The power pledged is at a very high price, which makes an industrial revival more difficult as cheap energy is crucial to modern industry. Nor does it help bring down fuel poverty. The technology is unproven, and could be subject to delay and cost escalation. There are security issues.

The government’s decision to proceed is understandable, but a costly long term decision for the Uk. The next power stations ordered must offer much cheaper power if we are to have any cha ce of an industrial revival, as this need cheap energy.

HS2 never made any financial sense. There are many better and quicker schemes to improve rail capacity across the country that could be brought forward. This project is the most advanced of the three, but probably the worst value for money of the lot.

It would be a very brave government that swept away all these. It would need to have ready a good list of other projects that could be smarter and yield better returns, with realistic and quicker deadlines for undertaking them.

On Friday I attended the CAB event which followed their AGM in St Paul’s Parish rooms. I talked to the Chief Executive and some of the volunteers who provide such good help and assistance to those in need in our community.
Over the last year the biggest demand has been for help with benefits and tax credits, followed by debt, employment and housing. The friendly and wise advice that the CAB can provide is often important in helping people manage the problems in their daily lives, whether it be about money or disputes, jobs or homes. I am grateful to all of them for what they do.

I found Sir Michael’s statement that he will continue to veto a European army all the time the UK remains in the EU perplexing. Now we are leaving I do not see it is any business of ours to veto what they are going to do when we leave. It just annoys the very countries we wish to be friends with as we depart.
I do wish we would just get on and leave and stop paying our contributions. If we rightly do not go to conferences like Bratislava why do we help pay the bills?
Nor do I understand how Sir Michael can veto something that already exists and the UK has accepted. The EU has established eighteen battle groups, each at battalion strength, with a rota so that any two of them can be deployed at any time by the European Council. As the EU’s own website sets out “The battlegroup concept provides the EU with a specific tool in the range of rapid response capabilities.”
The UK has played its part on the multinational rota to provide forces. None are currently deployed but they could be.
There is also already a Eurocorps, mainly French and German, stationed in Strasbourg with 1000 soldiers.
In parallel the EU does have naval forces in theatre today. Again the UK is signed up to this. Two of the 7 ships on Operation Sophia in the Mediterranean are UK vessels according to the EU website. There is a also a 4-6 vessel force off Somalia in Operation Atalanta which receives UK assistance.
Just as many of us pointed out in the referendum campaign, there is a European military capability and they do wish to grow a bigger and more active army. Some Remain spokesmen told us this was all nonsense. The conversation at Bratislava reminds us that there are already EU forces and they do wish to strengthen them and make them more active.
The UK should leave well alone and ask itself whether it wishes to carry on contributing after it has left. 4 non EU countries are involved in these forces at the moment. Perhaps our defence Secretary could give us some guidance on this more interesting issue, which will be his call along with the PM.

As the 27 meet at Bratislava I thought I should offer the opportunity to all EU lovers to write in with what they would like the 27 to agree as their new “vision” for the EU. All the main players going to the meeting tell us they will pause for serious and honest reflection about the growing gulf between popular wishes and what the EU elites are serving up. It is also a chance for those of us who decided to leave to offer friendly advice to our former partners if we wish.

I must say I much prefer writing about the EU now I know it is no longer going to be our problem or partly our fault. I have long believed that as a good European the best contribution the UK can make is to depart from the monetary and political union. We never wanted either. We have been lied to by some in the UK debate that that is not the EU’s preferred destination. You feel the clearing of the air now the 27 can sit down and discuss the pace and scale of their integration without the UK trying to slow them down or pretending it is not happening.

Mrs Merkel has expressly called for some speeding up of integration. Germany of course wants quota systems for others to help to take the refugees, and more integrated approaches to economic policy so the other states accept more readily firm economic disciplines. France wants to re establish its influence over Germany and to be the main force behind more military union, working on the common EU forces they already have to make them larger and more effective. The Commission as always sees Brexit like all other democratic checks to the EU as a chance to increase Commission power and the range of matters it controls. Mr Tusk makes the most sombre and realistic assessment, as he has to deal with elected officials and the national Parliaments. He wants answers to the growing popularity of Eurosceptic challenger parties of right and left.

My advice to them is to understand that the Euro is the centrepiece of their union, the main achievement of their pressure to integrate so far. The main actions they take must be ones that make the Euro more like a national currency in a major country. These actions are required to tackle mass unemployment in the south and west of the zone. to strengthen weak banks across the zone, and to provide the free movement of capital labour and people that a currency zone needs. Trying to do this without a single official language is always going to be difficult.

To make the Euro more secure and the project more popular, the first need is to set up proper transfer systems so the richer areas can help the poorer areas on a much bigger scale than today. Regional transfers in the UK or US are many times the level of such transfers in the Eurozone, taking place through national benefit rates and schemes, through local authority financing and through large scale regional and sectoral programmes. German, Dutch, Austrian and other richer country taxpayers have to be persuaded that poverty in Greece and unemployment in Spain is their problem too, and they need to make a financial contribution to alleviating it.

The second task is to put in a comprehensive system of bank deposit guarantees that operate across frontiers, and to have a scheme for getting all major banks up to satisfactory levels of capital adequacy more quickly. The EU sovereign and the ECB must jointly stand behind all major banks in the system and be seen to do so. In practice member states customers and investors are on risk, but so also the taxpayers ultimately have to be on risk or be prepared to bridge or prop the parts of major banks that are essential to keep the cash points open. Of course I favour the investors being more at risk than in 2008, with better protection of the taxpayers interests than we then enjoyed. The EU itself needs a broader tax base.

The third task is promote an EU budget large enough and helpful to growth and enterprise. The extreme austerity visited on Greece and some other problem countries in the zone has been a social and economic failure. This needs to be sensibly reformed. Now the ECB has bought up large quantities of member states debts, the overall net borrowing position of many member states is more acceptable.

If the single currency cannot be managed in a way which gets down high unemployment, and spreads better paid jobs more widely around the union, it will be increasingly difficult to get political support for the project. If the richer countries and reigons are not prepared to pay more for the union then it would be best to abolish the Euro.