Author: johnredwood

Labour’s great banking crash and recession has tested political debate to destruction. Politicians,  parties and most in the media are happiest talking about a few billion of spending. To most people a billion is a lot of money, without having any precise feel as to how much. It is a lot of money, but it is also  just fifteen pounds each for every man, woman and child in the country. It is not a significant sum when discussing the UK economy. It is a small rounding error in the national accounts.

In this election the biggest annual sum argued over has been the £8 billion extra for the NHS. It hasn’t  been much of an argument anyway, as Lib Dems and Conservatives say they will pay it, and Labour in office would end up paying it. The largest individual sum is the misleading £100 billion   for Trident which is some kind of lifetime cost. On a similar time frame the NHS would  be  say £3000 billion. The actual cost of four new submarines would be around one quarter of that, spread over a number of years of building.

Yet as I have set out we are talking in theory of annual public spending of  £737 billion , rising to  £797 billion over the next Parliament on Conservative plans. There is little discussion of whether these are the right totals, and whether we get value for all that.

More importantly, the UK Parliament proved incapable of having good debates about the far more important large numbers which determined our economic crash in the 2005-10 Parliament or the progress to recover from it  in the last Parliament. The £375 billion of QE was worth more debate and examination than it got. The massive £800 billion of assets and liabilities removed from the balance sheet of the state’s own bank,RBS, was crucial to our economic progress.It was only when there was a change in policy towards RBS in 2013 that the economy started to improve more quickly.  It would be good if in the last days of this election campaign there could be some discussion of the big numbers that have a real impact, as well as debate over  the nice to have smaller sums that are important to particular programmes but do not have much impact on the economy as a whole.

Some times predicting is easy. You look at what happened when somewhere else tried something, and reckon the same will happen when your country does. With QE that may not be so easy. Japan has been trying QE for a long time. In their case inflation stays very low, output does not expand as quickly as they would like, so they just do some more. Japan has become the most heavily indebted of the advanced countries, as successive fiscal and monetary stimuli fail to inject inflation or supercharged growth into the economy. The government has racked up record levels of debt.

The high debt levels are less worrying than they seem for two reasons. The first is a lot of the debt the state owes to itself. Once issued, the Bank of Japan buy the debts back for the state with created money.  The second mitigation is the interest rates on the debt remain tiny, thanks to QE purchases of bonds designed to keep rates ultra low.
I suspect the US and UK are different from Japan. Both the US and UK economies are now growing more rapidly. There are signs of monetary growth without QE. Both economies have a past history of being prone to more inflation. The USA keeps talking about getting interest rates back to a more normal level.The UK has deferred any such plan, thanks to the collapse of commodity prices and the greater strength in sterling, limiting inflation for the time being.
The Fed and the Bank of England are rightly wary of moving too fast to raise rates and choking off recovery. They are also conscious that for the time being they are more likely to undershoot their inflation target and have to explain why, than to face an inflationary issue. The US recovery is more advanced and has been proceeding for longer than the UK one. The US commercial banks are now generating extra credit, and US money supply is now growing at 8% per annum. That should be pushing the Fed to earlier action on rates. It begins to feel as if the economy and the banks in the USA are more normal. 0.25% as a base rate is anything but normal. The UK will have the luxury of watching what happens when the USA does start to make her move to normalise. If, however, the UK had a change of government policy to increase spending and borrowing, the UK might find markets intervened and started to drive sterling lower which in turn would start to increase prices.

I was asked when campaigning in Earley on Saturday to set out more of the details of Conservative proposals on migration and welfare.

Mr Cameron has pledged to negotiate a new deal with the EU to reduce and limit their power in the UK, and to base the relationship more centrally around membership  of the single market.

He wishes to regain more UK Parliamentary control over the UK’s borders and welfare policies, to hit his target of a substantial reduction in net migration into the UK.

His particular policy changes include

Asking anyone who has been in the UK from the rest of the EU looking for a job to leave if they have not found one in 6 months.

Removing Child Benefit from EU migrants in the UK or any child not resident in the UK

Remove all in work benefits from any EU person with a job in the UK for the first four years of their stay.

No out of work benefits for EU jobseekers on arrival in UK

He has stated that he will legislate for the In/Out referendum in the first 100 days of a Conservative government.

When Labour first embarked on Quantitative Easing I was uneasy. My preference was for them to mend the commercial banks quickly. Indeed, my prior preference had been not to damage them so much in the first place. If they had mended or not damaged the commercial banks through their wild monetary and regulatory policies, swinging from too hot to too cold too abruptly, we would not have had to consider QE.

If the commercial banks had been buttressed swiftly – preferably in ways which left the original shareholders and senior executives with their losses, and the taxpayer with contingent guarantees or remunerated loans – we would not have needed QE. Instead, buying shares in the banks and then demanding they held much more capital meant painful surgery and a long delay before those banks could help finance a recovery.

Quantitative easing was very much a second best policy. It achieved something, but it also has lots of side effects which are difficult to handle. The main aim of a QE programme is to drive down long term interest rates, in the hope that then more people and businesses will invest and borrow. The programmes surely drove down the rate, but all the time banks are under a regulatory cosh to raise more capital, and all the time markets are hesitant about the future, not a lot of long term borrowing and investment takes place.

The secondary aim of a QE programme is to get people to take more risk. This again did work. By definition the individual investors and the investment funds that sold bonds to the Central banks, usually bought riskier shares with the money. Some of this money found its way into hands that would create new investments, and the stock markets were able to raise some money for companies in need of it.

The main side affect of the QE programmes has been to enrich the holders of bonds and shares by raising prices substantially. This has been most noticeable in US shares and in some continental European government bonds. The late and large ECB programme has already driven bond yields to crazy levels in Germany. Anyone lending to the German government for any time period up to nine years has to pay the German government for the privilege of lending to it!

Successive programmes of QE in Japan have not proved to be inflationary in terms of general prices, though there too they have proved inflationary for the prices of bonds and shares. It is a reminder that if there remain problems in the commercial banks, and if a society is determined to save more and spend less, QE does not solve all the problems.

QE mainly enriches the state. It allows governments to spend and borrow more at surprisingly low cost. It also gives a bonus to savers who own financial assets, but they need the capital gains to offset the loss of savings income, given how low the interest rates go.

There has been a lot of nonsense talked about budgets for the next five years. The Conservatives have set out their plans in the last 2015 Budget book from the Treasury. Few seem to have read it, so here is a reminder.
The aim is to eliminate the budget deficit. Spending will rise from £737 billion (£11,497 per person) to £797 billion (£12,434 per person) , an increase of £60 billion. Taxes will rise from £602 billion (£9391 per person) to £746 billion (£11,638 per person). This will more than remove the deficit after other income is taken into account. The rise in tax revenue comes from growth in the economy, not from higher tax rates.

Spending is effectively frozen for the first couple of years. The rate of cash increase should keep up with pay, prices, and productivity growth, given the current low level of inflation. There is no need for there to be a real terms cut, unless inflation takes off. This allows for the extra £8 billion for NHS spending.
Revenue will grow well assuming as the Treasury does that the economy continues to grow faster than 2% per annum.

So we can sum up the last five years and the Conservative plans for the next five years in two simple rounded figures – in each of the 2 Parliaments, spending goes up by one thousand pounds per per person,and tax revenue goes up by two thousand pounds per person, eliminating the need to borrow any more.