Author: johnredwood

These two simple ideas still seem to cause trouble for some politicians and political commentators. Let’s have another go at explaining where we are.

The UK has a large state debt. This is the accumulated borrowings taken out by successive governments to spend more than they collected in taxes over many years. These borrowings do not suddenly have to be repaid. They are regularly refinanced or rolled over, as bonds issued become due for repayment. The UK tends to have longer term borrowings than many other countries, and can currently borrow very long at low interest rates.

The rate of increase in these borrowings has been very fast in the last two Parliaments. Labour doubled the debt, and the Coalition has increased it by around 50%. This is a matter of concern. Whilst so far it has been easy to raise the money, the amount it costs to pay the interest on the debt builds up to unacceptable levels if a state simply carries on borrowing at an excessive rate. This government has benefited from interest rates going lower and staying lower for longer, but even so, the interest costs are rising. Most people in the debate – including Labour – believe there has to be some limit on the rise in interest costs. One day interest rates will go up again, and then the progressive impact on the public finances will be uncomfortable as new debt is issued at ever higher rates.

The deficit is the annual increase in the amount borrowed. It is the amount of extra spending being undertaken each year which we cannot afford out of tax revenues. State borrowing is deferred taxation. Every year a government borrows it is saying to current taxpayers we will let you enjoy higher public spending than you are paying for. However, those same taxpayers and their children will have to pay the interest on the borrowings on top of regular spending in future years, and may at some point have to pay off some of the debt.

All the main parties in the election now accept the need to reduce the deficit. Labour says we only need to eliminate the deficit for current spending, and can carry on borrowing lesser amounts for investment or capital spending. The Conservatives say the whole deficit has to be eliminated in view of the debt mountain already incurred.

To do either of these feats requires a lower level of public spending and or higher tax revenues. Conservatives say that cutting public spending by 1% a year for the next three years will do the job. There is no need for tax rises. As the economy grows so more revenue comes in. Labour so far has not specified how much it wishes to achieve by tax rises, and how much by spending cuts.

This Parliament the deficit has been brought down by one third in cash terms or one half as a proportion of the economy, by moderating the rate of growth of public spending and by the VAT rise. Other tax rises like the CGT increase and the 50p Income Tax rate actually lost the Treasury revenue. This experience shows there will be no return to the 1930s, no hacking away at the NHS or other crucial services, to achieve the elimination of the deficit.

RECENT DEFICITS;

2008-9 £102.6bn
2009-10 £162.7bn
2010-11 £143.1BN
2011-12 £123.7bn
2012-13 £125,8bn
2013-14 £102.3bn

Current level of state debt (excluding pension liabilities) £1.5 trillion.

Mr Miliband is getting what he asked for. He wanted an energy price freeze for heating and lighting our homes. This is now happening.
In the meantime wholesale energy prices on world markets have been falling, as the price of oil falls. Mr Miliband now wants to see price cuts. The problem is, his former policy is getting in the way of the full price cuts we would all like to see.
Energy companies were persuaded to buy more energy forwards in response to Mr Miliband’s announcement, in case he won the General Election. Many of them locked themselves into relatively dear energy to avoid future rises, before energy prices started to tumble. Others are reluctant to cut prices yet, in case he wins in May and forces his price freeze on them. You can only buy forward easily for part of the two years, so have to worry about possible rises towards the end of the period.
It’s a good illustration of how well intended political intervention can make things worse. We now have energy companies locked into buying dear energy for longer, at a time of falling prices.
The long term answer to our dear energy problem lies in harnessing the various sources of cheaper power, moving away from expensive wind energy. The short term answer is for politicians to interfere less and allow the market to bring prices down, as is happening for petrol and diesel for our vehicles.

If you look at the total burden of debt in any given country you need to look at the borrowings of the state, of private individuals and of private sector companies. Inspection of total debt figures reveals that Euroland is considerably more indebted as a proportion of its income than the USA.(450% versus 300%). Japan is more indebted than either (600%). Ireland leads the list of highly indebted countries. (1000% GDP). Smaller countries with large banking sectors like Switzerland also tend to have apparently high leverage, as the bank balance sheets have a big impact on the national figures. The UK is more in line with Euroland, but has a better growth rate and a larger financial sector to assist paying and to explain the figures.

Household debt in the UK is below the levels (relative to size) of Denmark, the Netherlands, Switzerland, Ireland and Portugal, but higher than other European countries. Overall private sector debt in 2011 according to OECD figures in the UK was similar to that in the US at around 200% of GDP, well below the levels of the Netherlands, Japan, Portugal, Belgium, Ireland and Spain.

Japan emerges as a highly borrowed country in both its public and private sectors. However, it has very little external debt which is always more problematic to service and repay than local debt. It also now owns a great deal of its own state debt following endless QE programmes, which makes it even easier to service, and enjoys very low interest rates. It means its high indebtedness has not been a problem and seems unlikely to become one anytime soon.

The high debt levels in some Euro countries is more of an issue. Under the rules of the Euro so far they cannot print money to buy back their own state debts. Tougher ECB control of their commercial banks also means they have to rein in private borrowing through the banking system. It is interesting that neither of these rules has resulted in a more lightly borrowed Euro area than the USA, for example. It shows how a lack of growth makes stabilising and reducing debt so much more difficult.

There is a new fear abroad. There is the fear of deflation gripping the world economy in its icy hands. So is deflation terrible? And is it likely? I suggest the fears are being overdone.

Deflation means a general fall in the price level of a country or currency zone, not a fall in some prices like energy whilst others may rise. Falling prices can then react to encdourage falling wages, which in turn can generate falling output. As prices fall so people hold off buying the inessentials, knowing they will be cheaper later. This in turn can induce further price falls as stocks hang heavy on producers which they need to discount to sell.

This is not currently happening in any major economy in the world. The world’s two largest economies, the USA and China, are both growing at satisfactory speeds, and both have low levels of inflation, not falling prices. The same is true of the UK. Latin America’s largest economy, Brazil, has the opposite problem. Inflation and currency weakness have been too pronounced, so Brazil has hiked interest rates and is forcing down the growth rate to try to get inflation down. India has quite high inflation and good growth. Russia has high inflation following a currency collapse. Even Japan, a country which had no inflation to speak of for over 20 years, now has some inflation mainly thanks to a tax hike, and a monetary policy designed to get price rises up to 2% per annum.

So the worry comes down to Euroland. There inflation is now very low, and may dip further into negative territory this year. Growth is very sluggish, and parts of the zone including Italy are back in recession. The fear of deflation is being used by the doves at the European Central Bank to encourage moves towards creating more money to ease the squeeze on the distressed parts of the zone.

Deflation is to be feared if a substantial fall in the price level is part of a general slump in incomes and output, as in the early 1930s. Even the Euro area is not on the threshold of such a development, barring a sudden whirlwind Euro crisis and collapse which is unlikely at the moment. Sharp falls in some prices like energy can provide a stimulus, especially for countries which import a lot of it. Price stability or even a small fall in the general price level need not mean recession or worse, as Japan, Switzerland and some others have demonstrated in recent decades. Deflation only gets serious when it is spurred by banking collapse or consolidation, leaving an economy short of credit for worthwhile new ventures.

As a freedom lover, and as an MP, I support free speech.
As a moderator of this site and as a legislator, I appreciate there do have to be legal limits to free speech. Today I invite you to explore what limits should be placed on this crucial right. I invite you to do so in ways I can easily publish.
There have been many fine defences of free speech in the media over the last two days. I also note that the BBC and the main newspapers decided against reproducing the cartoons which were cited in connection with the mass murder and outrage in Paris. I here will stick to their line.
We can all agree that the barbarism in Paris is inexcusable. Our thoughts are with the families of those who lost loved ones in the various murders.
To have a vibrant democracy all institutions, especially government and people in power, have to be exposed to public criticism and popular scrutiny. To have a vibrant democracy there also have to be open and agreed limits to how far people can go in exercising their right to free speech. Satire, biting comment and cartoons all have their role to play.
Most people also agree that individuals, even individuals in elected office, have the right to protection against harmful and false allegations. To have a strong but healthy debate people need to be able to criticise or ridicule individuals, but not to make false claims without the individual concerned having the right to demand an apology and damages for the extreme cases. I regularly delete comments for this site because they make claims – often about my political opponents – that are hurtful if untrue, are often lies, or are difficult to prove. Comparisons of people with views you do not like to Hitler for example are common but normally excessive or disproportionate.
Most people also agree that groups, churches and other institutions should have to accept criticism and satire along with the rest of us. However, we also do need law to keep this within acceptable bounds. On this site I tend to protect institutions as I myself do not wish to attack or libel them and do not have the time to be dragged into disputes if the institution hits back.
To take an extreme case, Germany before the wars allowed and encouraged harsh language against Jews, which gave way to causal violence and discrimination which led to a programme of mass murder from the state. The development of insult and false allegation at the beginning helped fan the rest. This bitter history is part of the reason we have a law against inciting hatred.
The difficult issue for any democracy is to know what is fair comment, what is permissible satire and banter, and what is unacceptable racist abuse or incitement to hatred. At a time when we come together rightly to support free speech, we need to remember the daily compromises and judgements that editors have to make. We all need to consider the impact our language will have on those hearing it before making a public statement. We all also need to condemn unequivocally those who regard mass murder as an acceptable way of life to make a higher religious or political point.

Additional comment

People will enjoy the irony, but I have deleted more responses than usual to this topic as I am busy and do not have the time to edit each of the long contributions that pose interesting issues.

The media and media quangos are finding it difficult to decide who should be part of this year’s leaders’ debates for the General Election.
The easiest version would be a debate between Labour and Conservative. This would pit the two main contenders for the job of Prime Minister against each other without the intervention of other leaders who are unlikely to be in a position to be PM.
Trying to find a set of criteria to provide an objective view of who should attend is easiest if you confine the debate to the two largest parties in Parliament, the two parties with the highest share of the polls for the GE, and to the current PM and Leader of the Opposition. Each of those criteria gives you the same two people as the answer. They are the two people most people want to hear, and most people think the main judgement in the end comes down to which of those two do you want as PM.
As soon as you broaden out the criteria you get into difficulties. Including Mr Clegg can be based on representing the party with the third highest number of MPs at present, who came a good third in the last GE. It would be a bit odd to leave out the Deputy PM many would say. However, the Lib Dems struggle to qualify if you consider current poll ratings, or performance in the recent European election.
If you include Mr Farage you can make a case on the performance of UKIP in the last European election, and on his current poll rating in third place in most polls. It is more difficult if you wish to make the number of MPs an important criterion, as there are several other parties with more than UKIP, leaving aside the two main parties.
The Greens say if UKIP attends then they must. They are prepared to go to law on this. They point out they did win a seat in the last GE when UKIP did not, and they are ahead of the Lib Dems in some polls. They are clearly a nationwide party with a distinctive point of view.
The Scottish nationalists could qualify if winning a recent election matters, as they won well in the last Scottish Parliament election. However, they can never form a government in the UK or be PM by winning a majority, as they only put up candidates in Scotland. They have a claim based on number of Westminster seats and current poll ratings indicating they are likely to win more than any other of the 2010 minor parties.
Once you allow the Scot Nats there are difficult issues with regional parties from Wales and Northern Ireland.
I understand the broadcasters difficulties. I think we do want a tv debate. The easiest to justify would be Labour versus Conservative. Once you wish to reproduce the rich diversity of a modern election it is difficult to know where to stop. If you are going to have one or two of the minor parties from 2010 there is a case for having them all, as they come from different angles and attack different parts of the main parties, so in the interests of fairness more is better.

This government has been keen to increase the numbers of apprenticeships on offer. Expanding these programmes gets more people into work, and gets more people into better paid opportunities. 2 million people have taken advantage of this so far this Parliament.
Employers interested in developing apprenticeship schemes should contact Stephen.lamb@oracle.com as the Thames Valley LEP executive responsible. It can be a good way for a company to train and grow its own workforce.