Author: johnredwood

The government will want to step up the pace of providing more homes, roadspace, rail capacity, electricity generation, broadband and other essentials for economic growth and industrial recovery. They may also allow a bit more borrowing at current very low rates to speed it up. There are plenty of schemes we require and networks we need to strengthen.

Meanwhile the incoming government has to make some very tough calls on three blockbuster projects that the pervious government favoured. Do they want to build Hinkley? Should HS 2 go ahead?Will they permit a new runway at Heathrow?

The business case for HS2 is the worst of any I have  seen. Hinkley poses issues over timetable, the costs of the power and security. Heathrow arouses considerable environmental objections though the business case is much stronger than the other two. All have considerable political and other downsides  from cancellation and entail writing off considerable  outlays and upsetting co investors . In each case there would need to be other answers to general transport and energy capacity matters, and efforts to replace the lost work.

I have my own views on what should be done. I invite you to give me your thoughts on these big three decisions.

In July UK retail sales rose by 5.9% on a year earlier, and were 1.4% up on June. If Brexit was going to have an impact on consumer confidence it would have been in the five weeks immediately following the vote, when a proportion of Remain voters were very unhappy and shocked by the result. Instead people have gone out and bought more  clothes, DIY and household goods. Many have also  been to spend more in hotels, restaurants and bars. These are all the kinds of purchases you make when you are  not unduly worried about your future financial position, as they are discretionary. It’s not all tourists, as it takes time for people to book and come after a fall in the currency.

Employment hit record levels by the end of June. The uncertainties of the campaign and the vote did not interrupt new hirings. The UK economy added 172,000 additional jobs in the second quarter of the year. Employment hit a new all time high at 74.5% of the working age population.  In July, after the vote, the claimant count fell again, showing that job creation continued. Unemployment fell by 8,600 in the first full post vote month.

Recent results from companies bear out this generally positive picture. Lookers reported good continuing sales of cars. Housebuilders report decent levels of interest in new properties. Kingfisher’s trading results for the 13 weeks to end July, including five weeks post vote, saw sales growth of 7.2% on a like for like basis (UK and Ireland) in stark contrast to its large French business where sales were down 3.2% over the same time period.

Some people remind us that construction figures have been weak in the first half of the year. This is true. However, when you look at the make up of the figures you see that private sector housebuilding showed good growth, and private sector commercial a little growth. There was a steep fall in public sector housebuilding and a fall in general public sector work. So was the wider public sector trying to make a point by holding back work? Or did the Treasury hold back money, inducing bad news?  It is certainly wrong to deduce from the overall decline that it was a drop off in private sector confidence owing to Brexit.

I wonder for how long will the Remain commentators carry on ascribing whatever happens in the economy to Brexit? There are many more influences on the UK economy than this vote. I do not for one moment ascribe the big increase in retail sales to the vote. As they made so much fuss about how there would be an immediate and dramatic loss of confidence causing a short term recession, it seems entirely fair to scrutinise the short term post Brexit figures. So far they show  we who ridiculed the official forecasts of a recession and house price collapse on a Leave vote have had the  best of the argument.

Owen Smith’s drive to the left and search for popularity has brought him to one of Labour’s oldest scare tactics – claiming the Tories have a secret plan to privatise the NHS.

Labour have claimed this every time the Conservatives are in government, and every time we fight a General election. During the long periods of Conservative government since the NHS was established the party has resolutely stuck to the principle of free at the point of need, and has maintained a largely public sector NHS workforce.

Labour in office has introduced prescription charges and charges for dentistry and glasses, which Conservatives have kept. Labour introduced wide ranging PFI contracts. involving the private sector much more in new projects and in carrying out clinical functions for the NHS. Conservatives have sought to reduce PFI use  and to get better value for money from some of the contracts Labour signed.

Both parties in office have relied extensively on private sector companies for a wide range of goods and services for the NHS. Both have bought all the drugs the service needs from private sector concerns. Both have used some private sector builders, cleaners, caterers and other support services. Both parties have allowed GPs and dentists to be private sector businesses contracting with the NHS for much of their workload. Both have occasionally bought clinical capacity from private providers.

So why doesn’t the media ask Mr Smith a few more pertinent questions. Does he intend to nationalise drug companies? Does he intend to take all cleaning, catering, building and other activities in house? Will he discontinue all contracting out, and stop all new PFI contracts? How much does he think such changes would cost? Why were previous Labour governments so wrong to use the private sector in this way?

The latest excellent figures for employment and jobs include the good news that in July the claimant count fell further. All those who shifted their forecast of job losses from the uncertainty of run up to the vote to the immediate aftermath of the vote have been proved wrong on both counts.

Japan, the Eurozone, the USA and the UK have all run programmes to buy up state debts through Central Bank action. In each case they buy the bond, but keep it, pretending that the state still owes the money. They find a way of accounting for the fact that they pay the interest due on the bond to themselves – it goes from one government account to another, as the Central Bank is  a creature of the state. It may have a little more meaning in the case of the ECB, buying up the debts of a range of countries. When the bond falls due for repayment they repay themselves, and normally reinvest the money in another bond they buy from the private sector.

In the case of Japan the purchase programmes have been particularly large and long lasting. There with state debt at a massive 230% of GDP they have avoided a problem meeting the interest costs of the debt by the twin effects of QE. Rates are now tiny or negative on new debts incurred. More than one third of the total state debt is now owned by the state itself through the Central Bank. The Japanese now have various options. They do not seem ready to simply announce they are cancelling all the debt they  owe themselves, as they could do. They might find a half way house. They could, for example, convert all the state debt they own into irredeemable or ultra long non interest bearing debt, which is almost the same thing as cancelling it though it  might look more prudent to some.

In the Euro area the latest substantial programme is running at Euro 80 billion a month, mainly government bonds. The authorities already own Euro 875bn of bonds. In the UK the Bank has decided to add £60bn to the stock of £375 bn they already own, out of a total state debt of £1.7tn. The US owns 12.8% of the stock of US Treasury bonds issued. All this means the actual indebtedness of these advanced countries is lower than the gross figures. The stress of having so much debt is doubly reduced,  by the very low interest rates they now have to pay people and institutions that do lend them money, and by the fact that they owe so much to themselves.

So far this process has not triggered worrying domestic inflations in the way you might expect, thanks to the weak state of many commercial banks over the banking crisis, and the fiercer controls against extra lending on the back of the money in circulation. There have been some inflationary pressures from weak currencies, which could be  brought on by relatively looser money and higher rates of QE. All the main countries in recent years seem to have favoured some decline in their currency, or have been unwilling to do anything to stop it. They cannot all devalue at the same time against each other. It will be interesting to see which if any of these authorities makes the next move in these unusual changes to the cost and ownership of state debts.

In my piece about the contest, I asked what was the point if Mr Smith ended up offering more or less the same policies as Mr Corbyn? The answer from the Owen Smith campaign is he can win an election to carry them out, whereas Mr Corbyn cannot.

Today a poll is published (BMG Research). It says 9% of the public would be far more likely to vote Labour if Mr Corbyn wins, and 10% a little more likely. For Mr Smith just 5% would be far more likely, and 13% a little more likely. Mr Smith has some way to go to prove his point.

Fewer UK medals at the Olympics was one of the small number of  bad forecasts Remain did not get round to making in the event of a Brexit vote. That was a good thing for them, as UK athletes are excelling themselves in Rio.  Nor did the  Leave campaign  claim there would  be more medals once we voted to be an independent country again, as that would be to politicise sports in an unattractive and misleading  way. We all send our congratulations to our Olympic competitors who are achieving so much thanks to their own great efforts.

It is nonetheless interesting that the top three  countries in the medals table alongside the UK in second place are all independent countries, not members of the EU.  France, Germany and Italy, the best placed EU countries, look unlikely to get into the top three.

You could argue that medals in the Olympics and membership of the EU are unconnected, so why raise the issue at all?  I do so, because it does pose an interesting dilemma for the increasingly centralised state of Euroland. Fostering a sense of national pride in the achievements of fellow countrymen and women, within the context of the brotherhood and sisterhood of world sport, is an important part of the Olympic spirit and attraction. One of the main interests in  the Olympics is the Medals table, which is deliberately constructed around national identity. Olympic athletes returning with medals are feted as national heroes.  The pro Europeans, ever keen to promote an overriding sense of European identity around the 12 stars flag, have to watch as France and Germany, Italy and Spain revert to their national symbols and colours.

The Olympics also poses a problem for EU ideas of collaboration.  Global sport proceeds by intense competition. Each individual and each national team is out to beat their rivals. Secrets are developed and preserved to gain an edge, not generally  shared with other competitors. Excellence is reached by supreme individual effort, backed up by strong national training, funding and general support. The results are stunning, with regular improvements in what men and women can achieve. World records are smashed and  the human frame pressed to yet finer and faster attainment. This is all very different language to the language of the Commission based on solidarity, mutual support and exchange.

My life so far has been punctuated by recessions and economic crises. These have usually been caused by a mixture of wrong government policy and poor Central banking. After all, between them government and the Central Bank wield enormous power to boost output and jobs, or to control inflation and excessive credit. The problem is, they often do the reverse of what is wanted. They have in the past been often unable to read the cycle.

The first bust I witnessed when young was the so called oil crisis recession of 1974, followed by the UK’s ignominious trip to the IMF in 1976 to borrow money. The country was ordered to cut public spending, to reduce its need to borrow.  I accepted the conventional explanations at the time, that the first bust was caused by the hike of the oil price, and the second was caused by bad policy in the UK. The first bust also had something to do with excessive credit leading to the need to curb inflationary pressures.

The third recession I lived through was the late 1970s  early 1980s one. This was brought on by the UK lurching from money growth and credit expansion that was too easy, to a tough money policy to purge the country of high inflation.

In the 1980s we experienced a longer period of expansion with moderate inflation. This was brought to an abrupt and damaging  end by the ill fated policy experiment of attaching the pound to the DM. This policy first took us into rapid inflation. The pound wanted to go up. To keep it down the Bank created and sold pounds across the exchanges, which came back and helped fuel over rapid money and credit expansion. In the second phase of this whip saw ride the pound wanted to go down. The Bank bought up pounds, which tightened credit and money too much and drove interest rates sky high.

From our exit from the ERM we enjoyed a good expansion with moderate inflation up to around 2004. Then the government decided on a major expansion of public spending, which went along with money growth and credit expansion. Total UK  borrowing rose rapidly.  Despite many warnings to the authorities in the middle 2000s that credit and money growth was excessive, the Bank and the government decided it was just fine and persevered with their reckless expansion. Late in the day they compounded their error by switching too rapidly and too drastically to restrictions on credit and banking liquidity, with the obvious results we saw.

Since 2009 credit and  money growth has been modest, compatible with some growth and low inflation. This has been arrived at  by tough restrictions on banks making more advances, coupled with extraordinary money creation and  bond buying.

Today the Bank needs to be careful. Money and credit growth looked about right  before their latest expansionary package of QE and lower rates. They need to remember that they have a twin duty – to keep inflation down as well as to promote activity.

The government has announced that it will make all the payments to farmers, universities and others that the EU is making once we leave. I am glad they have done this. The Leave campaign pointed out we can afford to do so and asked that the government did just that.

Some of the commentary has been bizarre. Trying to turn it into a bad news story, some have suggested that means we will not have the £10bn net contribution to spend on our priorities after all. This picks up an endless confusion some Remain supporters tried to create before the vote. Let’s try and explain it again. All the money the EU pays to UK farmers and others from the EU budget is all money we send to Brussels as part of our gross contribution, and receive back later as payments. This is the main difference between the gross and net figure. The net figure is what it says – the amount of money we send and do not get back at all. Once we are out we can spend that money as we see fit – or give it back in tax cuts to taxpayers – as we no longer will have to send it to the EU to be spent on the continent.

Leave made very few forecasts. Remain specialised in them. Their short term forecasts included rising interest and mortgage rates. Instead both have come down. They included stock market declines. Instead the UK markets have risen.  They included a short term recession. This looks unlikely. They included large falls in house prices. So far there has been little change. The RICS in its latest forecasts  now expects a resumption of house price growth over one and five years.

As one of the people who spent time in the referendum campaign saying I thought they had grossly overdone the gloom, I am pleased to see retail sales up and  mortgage rates down.  It was good to see both the Bank of England and the IMF produce post vote forecasts that assume UK growth this year and next. It was also interesting to see the World Bank scale back its pessimism and now say Brexit will lead to just 0.1% off world growth.