The government is currently concentrating on illegal migration with its eye catching and contentious promise by the Prime Minister to stop the boats that bring many of the illegal entrants to the UK. The Opposition parties oppose him strongly, demanding more safe routes for migrants and asylum seekers to come, and easier processes to allow people to enter more rapidly.
Most Conservatives believe the UK should provide refuge for some people fleeing violence or oppression elsewhere. This should be an offer as part of a wider offer by many richer countries to spread the responsibility and to provide geographical choice to those seeking a new home. Many of us also believe the UK has been offering too many economic migrants a home and a job here, seeking to perpetuate a model of growing the economy by recruiting plenty of lower paid labour from abroad. Instead we would prefer to see investment in machines, computing, training and higher standards to get more of the work done with fewer better paid people. We want more better paid and high quality jobs for people already living here, backed by the investment it takes to raise productivity and therefore wages.
The low pay model is not a great one for the people coming nor for the taxpayers who need to foot much of the bill for so called cheap labour. Paying people too little means state subsidy to provide them with housing, income top ups, health and education provision and a range of infrastructure and other public service provision. Last year we added 500,000 more people to our totals. To ensure they have a decent life that will take a lot of new housing, public sector facilities, roadspace, electricity and water capacity and a range of other capital intensive service provision. The EU some years ago suggested it took Euro 250,000 to provide for a migrant family or individual coming to the EU to provide all the facilities needed.
Just like government explaining its line on the pandemic, the Bank tells us its decisions are driven by the data. As someone who does seek to provide sensible forecasts of inflation, growth and deficits going forward, I agree you start your task by assembling good data. You seek to understand the figure you are forecasting, so you are aware of the way it is compiled and what affects it. You need also to be aware of the imperfections in the data, and the quirks from the judgements made about how to define and compile it. As we saw in trying to compare different countries handling of the pandemic the definition of a covid death and how strenuously the authorities sought to record them mattered a lot to data outcomes. Forecasting inflation produces different results depending on whether you use CPI, RPI, core CPI or some other index.
It is however wrong to say policy decisions are data driven. If they are they will be always looking backwards. You cannot drive the car successfully by looking all the time in the rear mirror, though that will give you a perfect understanding of all the hazards you have just missed. You need mainly to observe what you can see through the windscreen ahead, but you need to judge or interpret what you see. Will the green light go amber? Will the child step off the pavement? Could there be someone dashing out from behind the parked car? Is the road ahead clear enough to accelerate safely? To drive well you need to choose the right data – data about the road ahead, not the road behind, but you also need to interpret it dynamically. So it is with the economy. Knowing inflation has been fast does not mean it will be next year. Seeing oil and gas prices surged last year does not mean they will surge again to keep the inflation rate up. You need to judge how prices will alter ahead. Putting rates up because last month’s inflation was too high is not necessarily a good idea.
To make better judgements it helps to understand how prices rise. Here the Bank ignores money and credit, yet it is if there is an excess of money and credit around that you are most likely to get inflation through excess demand. The Bank does have a model of what might happen next based on a concept of capacity in the economy. They seek to judge how much capacity there is in the economy to make things and supply services and then compare that with demand. If capacity is fully used they expect inflation, if there is surplus capacity they expect inflation to subside.
There are several reasons why this is a very difficult way to judge the future. The first is it takes no account of the ability to import, yet an economy like the UK relies heavily on imports for marginal supplies of all kinds, so global capacity matters as well as domestic. The second is it is very difficult knowing what capacity is. A business may say it can only supply 200 widgets a day, but if pushed and offered more money it might be able to add a night shift to go up to 300. A restaurant might say it cannot do extra private dining, but could then discover it can hire more staff and open for more hours to serve more meals. Another manufacturer might discover that although he can put on another shift he cannot get an increase in components for the next two months to immediately boost output. To make it easier the Bank often relies on unemployment as the best indicator, assuming higher unemployment means companies could expand easily if there was extra demand by taking on more labour.
I will look in a future piece at why it is wrong to ignore credit and money and how it is difficult to find a reliable proxy for capacity utilisation which works for the future.
Today and tomorrow the Commons will take the Committee stage of the illegal migration bill. There are various amendments tabled to seek to make the decisions about the future of illegal migrants proof against excessive delays and legal appeals. Whilst it is important that anyone claiming asylum should have a fair hearing and a right to an appeal if necessary, it is wrong to allow so many legal interventions that people arriving illegally get to stay here for years whilst endless legal processes are explored against the original decision, at the taxpayers expense. It is also important not to effectively give illegal migrants some priority or ability to get round the rules and to stay here regardless of where they came from when there are safe routes for legal entry from countries where they are at risk.
The government is promising to look at the suggested amendments with a view to strengthening its Bill. It is important it does so, as people will expect these legal changes to be sufficient so the government can deliver its promise to stop the boats.
Most MPs tell me the Bank of England is independent. They tell me its sole purpose is to keep inflation down to the 2% target Parliament has set it. Yet when inflation runs more than five times target most MPs have no wish to debate why or to venture any criticism of the Bank.
They ignore the fact that government and Parliament appoint the Governor, set the target, approve and underwrite all the bond buying the Bank has been doing which meant ultra low interest rates, and question the Governor through a Select Committee. It has been lonely criticising the Bank for printing too much money in 2021 and now for destroying too much money in 2023, though all this has been approved and indemnified by government.
It was therefore a pleasure to read the Daily Telegraph yesterday with a leader and a good article criticising the Bank for its role in creating and allowing the inflation to take hold. The paper should go on and criticise the Bank for disrupting the bond market with its large Quantitative tightening programme last autumn, having to reverse it temporarily when it saw the damage it did to the LDI/pensions market, and ask more questions about whether they have now lurched from money being far too easy to being too tight.
In future articles I will look at why the Bank has got so many of its forecasts of inflation wrong in recent years, how it could improve its track record and how it should now proceed. I will stress that in practice the Bank has three aims, not just one. It does need to consider growth as well as inflation, and above all needs to ensure financial stability in the banking system that it regulates and finances. It had a bad record in the period 2006-10 doing this.
One of my reasons for campaigning over the Northern Ireland protocol is I want the UK government to be able to set or amend taxes they impose. One of the Brexit wins for me was going to be removing VAT from items that should not be taxed like female hygiene products, home insulation and other green items. I also wanted to raise the threshold limit before a small business has to comply. There are many cases now of small businesses that stop trading during the year in order to avoid exceeding the £85,000 turnover limit. Literally guests houses have some months when they refuse guests and many small trading businesses discourage orders when they are getting near the limit.
The arguments of the last few weeks have not for me been theoretical or constitutional or over diplomacy. They have been about these basic issues of who sets the taxes and who fixes the law that have a direct impact on the small businesses of my constituency and the rest of our country. In 2019 the UK lost a case in the European Court and was forced to impose VAT on wind and water turbines. A complex services test was imposed before insulation could qualify for zero VAT. In 2022 the UK legislated to correct some of this bad judgement, but could not make changes for Northern Ireland under the Protocol.
I have long been worried that the Treasury’s reluctance to raise the VAT threshold relates to their belief that they cannot do so for Northern Ireland. I will table some more questions about what powers the EU will still have under the latest agreement, both over NI and the whole of the UK. It appears the UK has accepted it needs to keep much of the VAT law framework. VAT is a bureaucratic tax, expensive for business to administer. Instead of just being a tax on the final consumer, a simple purchase tax, it is a tax on all business activity. It needs a system of input and output taxation, with businesses trying to reclaim VAT on materials and intermediates, as every time a component, material or finished manufacture changes hands it attracts VAT.
When the Red Wall seats tumbled to the Conservatives in 2019 they did so for two main reasons. Many voters were angry with Labour and the outgoing Parliament for seeking to overturn the results of the EU referendum. They voted to get Brexit done. They also voted for a Conservative government rather than a Corbyn led Labour one, expecting a Conservative government to be much better at managing the money and promoting their own prosperity.
They did not lend us their vote. They gave us their vote. They did not vote Conservative hoping for the Conservatives to be Labour light. They knew the Conservatives might cut tax rates for the rich as part of a general tax cutting agenda to make all taxpayers better off. They were reassured by a Manifesto that clearly ruled out most tax rises, unlike Labour. They expected the Conservatives to promote growth and to restrain migration. They expected some opposition to wokery. They knew the Conservatives would look to the private sector to do more of the heavy lifting of investing and promoting jobs.
Some Conservative MPs and Ministers seemed to think they needed to be more like Labour to keep these wandering voters. A Conservative government with a majority of over 70 has as a result introduced windfall taxes that do not even limit themselves to just taxing windfalls. These will now cut supply and damage investment. It has hiked business taxes. It has renationalised large parts of the railway. It has spread state education and child minding down to babies and the under 5s. It locked the whole country down for long periods, instructing people not to meet friends and family or to go to their regular places of work. In each case Labour has supported these moves but of course complained that they did not go far enough or were introduced later than desired. It has reinforced the misleading Labour idea that prosperity comes from Whitehall grants, encouraging MPs to bid for state funds to renovate or adorn their towns and cities, without releasing sufficient entrepreneurship to rev up the private sector economy.
Some of my correspondents write to me about the Lab/Con coalition they think we live under. They do not praise it, but complain it is not delivering what they thought they were voting for when they voted Conservative three years ago . Where is the clean Brexit, free of the EU and European court interference? Where is the control of our borders? Where is the low tax pathway to faster growth they ask? I write back and explain that there are some clear dividing lines between Conservative and Labour. Just look at the squeals of protest from the left as the government does try to implement the Prime Minister’s most memorable promise, to stop the boats. There has been some fight back over extreme wokery, with a successful challenge to the SNP’s approach to legislation on gender issues. The government was persuaded to reverse its foolish increase in National Insurance, and says going forward it wishes to cut taxes for the many.
There is still the danger that the government will not do enough to show why voting Conservative gets you a better deal and is sufficiently different from the massed parties of the left. They fight each other to be more pessimistic about the outlook, to be greener than each other in ways which intrude on daily lives. They invent news ways to tax success and enterprise. They favour importing anything that creates carbon as if it saves the planet if foreigners generate the gas and take the jobs and profits. They vie with each other to come up with more ways of regulating business and family life, and to expand the state budgets and workforce well beyond the affordable.
This week we see a Conservative government confident it can win votes on a high tax budget strategy as the Opposition parties like it much more than many Conservatives. We see a government that was granted a blank cheque to do a worse deal than it eventually did with the EU, as there is no sell out too craven for the Opposition to accept. It can rely on Opposition votes to get through the contentious Protocol legislation. Conservatives and Unionist allies are full of worry about the continuing powers and ability of the EU to control Northern Ireland and cause tensions within our Union, but the coalition in Parliament has plenty of votes.
The Prime Minister’s five aims make sense. Inflation will come down as it needs to do, thanks to the extreme monetary policy flip flop from the Bank of England. The NHS waiting lists can come down assuming the government has now sorted out pay levels and can see more medical staff recruited to get the job done. Growth will resume next year, though it needs to be sooner and faster. Borrowing levels will reduce when growth is fast enough. Stopping the boats is crucial. The public will want success, not just good intentions.
Speeding economic recovery is central to winning again. It takes a substantial tide of economic growth to lift enough voters boats. That in turn needs tax cuts to boost living standards and demand, and needs a dedicated programme of licences, better regulations and government contracts to start increasing our capacities to supply everything from home grown food to bullets, from home produced oil and gas to UK made cars, from more broadband to a much larger electricity grid. There is not much time to do all this before the next election. The crucial thing for the government to remember is many people voted Conservative knowingly and for two clear purposes. The government must do everything possible to take full control of our country and its borders, and must do far more economically to promote growth and investment.
Does the right hon. Gentleman agree that because the EU will have powers over things such as VAT and state aid in Northern Ireland, it will also have powers on a drag-through basis over the whole United Kingdom? Does the whole United Kingdom not need a veto?
Sir Jeffrey M. Donaldson
I agree with the right hon. Gentleman. That is why we need a solution that enables the United Kingdom Government and this Parliament to regulate the entirety of the United Kingdom internal market. That is the solution. I am not saying that where Northern Ireland businesses trade with the European Union, EU standards and rules should not apply; I am saying that we can allow for that. What I do not accept is a situation where every business in my constituency must comply with EU rules even if they do not sell a single widget to the European Union. That is wrong, because it harms our place in the internal market of the United Kingdom.
The Stormont brake seeks to address the democratic deficit that I have mentioned, and to an extent, it provides a role for Stormont to pull that brake where changes to EU law occur, but I note that it does not give us any ability to deal with existing EU laws that impact on all manufacturing in Northern Ireland—laws that have been applied without our consent. To that extent, the brake cannot apply. It applies to amendments to EU law or changes new EU laws that are introduced.
I also note that in the proposed arrangements, it is available to the EU to take retaliatory action in the event that the UK Government apply a veto to a new EU law. That is a matter of concern to us in Northern Ireland, because retaliatory action could come in a number of forms. It could include the suspension of arrangements in the green lane, which would impact our ability to bring goods from Great Britain to Northern Ireland. We need to be clear that it is wrong for the EU to be able to intervene at that level in the free flow of goods from one part of the United Kingdom to the other. I highlight that issue as a real matter of concern to us.
John Redwood (Wokingham) (Con):
Why do EU laws apply under this agreement to businesses in Northern Ireland that are not trading with the EU? How many EU laws apply, and why can we not see a list of them?
Chris Heaton-Harris (Secretary of State for Northern Ireland):
It is less than 3%. This preserves access for Northern Ireland businesses to the single market, and yesterday I listed a whole host of different areas in which these EU laws are disapplied in Northern Ireland.