I have been in demand by MPs and the media to explain how the bond markets work. As daily we have front page news of movements in the price of bonds and therefore in the longer term rate of interest, let me have another go.

If a government issues some debt to pay some of its bills, it promises to make a regular fixed payment of interest on the debt. So, let us say it sells £10,000  of debt at 1% interest  to a bond buyer, as part of a much bigger issue . For ease of calculation let’s say it never promises to repay – there is some debt like that. Such irredeemable debts are similar in the way they behave to long dated debt, 50-70 year debt which is repaid at the end of the stated time. The UK has been issuing some 50-70 year paper which is a debt that only repays a long time hence.

If the Central Bank then decides to put interest rates up to 2% the owner of the 1% paper is being short changed but their interest receipts stay the same. If they want to sell their bit of the debt on as they can do in the bond market, they will find that the price of it has  halved. The buyer of the £10,000 bond will only pay £5000, as he wants a 2% rate and the £100 guaranteed interest payment stays the same, to give him 2% (£100 divided by £5000).

We have just lived through a period when the Bank of England has bought up £875bn worth of bonds, at ever crazier prices, taking the interest rate on them down to tiny amounts. Now they wish to drive interest rates up. They can do so by having the sole power to set the official short term rate of Bank rate which we know, currently now up to 2.25%. They can also do so by manipulating the price of bonds.

As the largest buyer of government bonds in recent years their  decision at the end of last year to stop buying them pushed the market down substantially and therefore longer term rates of interest up. On the Thursday before the Kwarteng Statement the Bank announced it would go further, seeking to reduce its holdings of government bonds by a chunky £80bn. The thought of the Bank selling bonds led to price falls as the Bank must have wanted. To get the longer term interest rates up they need to get the price of bonds down.

By the following Wednesday the bond market had fallen a lot. The decline was bigger in the UK than in other countries where Central Banks were also forcing rates up, mainly because in the UK a lot of pension funds had bought into funds that let them indirectly own more bonds than they had to fully pay for. As bonds fell they had to put up more money for these geared positions, forcing yet more sales to raise money for the calls. The ECB is not threatening to sell some of its huge holdings of bonds as it is worried what that  might do to their bond markets.

The Bank then decided this had gone too far and flipped from being a seller to being a buyer again of bonds to try to stabilise the prices. The Bank’s own pension fund has exposures to these vehicles. On Friday they changed again, ending buying with the possible threat of sales hanging over the market. It meant the market fell sharply after the announcement of a change of policy and Chancellor.

It is true some in the markets disliked the absence of forecasts and costings with the Chancellor’s measures, but as the gyrations in the week following show the main driver of bonds falling and then recovering was Bank of England action. The Bank can have a big influence on whether mortgage rates go up or go down. The commentary which sees the whole thing as a response to the mini budget is simply wrong. I have always wanted the government to set out costings and present spending and tax at the same time as is traditional.

 

On Monday we will be asked in Parliament to approve a comprehensive set of powers for government to set maximum consumer prices for energy, to send large subsidies to energy suppliers who have to sell below cost and to remove surplus revenues from producers of electricity selling well above cost.

Of course we need to look after people who cannot afford their energy bills and need to offset some of the big hit to consumers generally. The energy price rise is like a massive tax rise.

We also need to be careful not to stop companies investing in new capacity or deter big users of power from seeking to improve their energy efficiency and reduce their use. We also need to keep the cost to taxpayers down where possible.

I would be interested in your thoughts on if there could be a cheaper and less all commanding scheme that would work?

 

The Prime Minister was right to want to keep the UK corporation tax rate at the lower end of the advanced countries tax table. We need to carry on attracting large investment  flows into our country and leaving domestic businesses with more of their profits to put into new investment.

It appears the PM has been persuaded to row back on this promise of her election campaign to “ensure economic stability”. I do not think this measure does that. After the 2.30 announcement yesterday  there was a sharp sell off in long bonds. Interest  rates on the 50 year paper rose by more than 0.4% or 40 basis points. As the PM’s critics wrongly think the UK bond  markets currently move on changes of government policy they need to explain why when the PM did the main thing they wanted the bonds sold off sharply. Maybe long bond movements in recent days have more to do with Bank of England management of the market.

Sterling was unchanged after the announcement instead of rising as her critics implied.

Instead of changing individual items in the tax proposals the new Treasury team needs to bring forward the spending proposals and show us forecasts of the deficit. We need a menu of tax and spend options with prices to influence and judge the full budget and fleshed out growth plan. The PM promised MPs a series of meetings and consultations over the next week preparatory to the full budget. These talks need the government to keep open tax cuts as well as increased spending on priorities and cuts elsewhere. If they have already taken the key decisions the talks are pointless.

I am all in favour of actions to get the deficit down.I have been forecasting a higher deficit this year than the £99 bn OBR budget estimate. To control it I would look first as the biggest change by far that the new PM has announced, the energy package. It should remain very supportive for people on low incomes, but there could be more burden sharing for higher earners who burn a lot more fuel.

Bizarre to hear the media and Opposition mobs out to pull down the PM by forcing her to tear up her pledge to keep the UK competitive on business tax rates.

As always the Opposition wants to do the EU’s dirty work to make us less competitive and get in the way of us attracting more business investment and more jobs.

The think tanks and forecasters who want taxes up tell us the deficit will otherwise be too big. If they have their way they will put us into a longer and deeper downturn which will mean a higher deficit, not a lower.

Over the last 2 years the OBR has massively over forecast the budget deficit and used these wrong forecasts to push a Chancellor into higher taxes. More accurate forecasting would conclude now that a lower business tax rate would be better for growth and for total tax revenue.

This year I disagreed again with the OBR deficit forecast. Unlike the two previous years when they massively overstated the deficit pushing the then Chancellor to tax rises, I thought this year they were too low. They will now need to increase forecast substantially. If we added tax rises to the big squeeze the Bank’s higher rates and the energy price surge is bringing we could well  end up with an even larger deficit. Making the downturn longer and deeper would cut tax revenues and increase benefit spending.

The government has said it is considering allowing extraction of onshore gas in the UK subject to community consent and full  safety and planning controls.  Critics of this approach call it fracking, which is a description of some reservoir management techniques that have been commonly used in oil and gas wells for many years and have been accepted as safe. In order to sustain or increase pressure in some oil and gas deposits so the gas and oil flow to the surface it is necessary to inject agents, most often water, to increase pressure in the strata to move the gas on. There could  be low level seismic shocks from this process which produce little or no disturbance at the surface above the reservoir. These shocks are monitored and controlled, and are usually below the level of shock created by a bus going by on a nearby road, or felt near to a building site.

Producing more of our own gas would  be good for the environment and good for our economy. It would more than halve the CO2 output compared to relying as we do today on too much imported LNG gas. These imports need energy to compress, liquefy, transport and convert  back to gas which we do not need for home produced gas. Imported gas attracts large tax revenues which are paid away to a foreign country, whereas home produced gas would be taxed to help pay for local services. Home production brings well paid jobs . Home produced gas would likely to be sold as contract gas, avoiding the price spikes of buying gas on a volatile world market. It would ease our indirect dependence on Russian gas into Europe.

I also think it fundamental that work on such a gas well should only go ahead where the local community affected by it has given consent and participates in the revenue or uses some of the gas produced. I would not want a gas well close to a town or village in my constituency where the public did not wish one. The idea behind requiring community consent would be to encourage wells and drilling well away from homes. People should have the choice, and some may well wish to allow drilling a mile or two away from their home in return for payments from the producers. This policy is currently being consulted on and is not firm, so your ideas would be especially welcome.

 

The IMF revised its forecasts for world growth down for next year at its annual meeting. It now expects Germany and Italy to show negative growth next year, with the UK up by just 0.3% and the USA by 1%. The IMF revised UK growth for the current year  up to 3.6%, ahead of USA, China, Japan and Germany. It reflected many other forecasts in expecting inflation to fall throughout the advanced world next year including the UK.

The IMF expects the UK’ central government net debt to be at 68.5% of GDP next year, and down to 56.5% by 2027, well below the levels forecast in the USA, France, Italy and Japan but above Germany. Those who value external independent forecasts might like to take this into account when commenting on the UK economy.

The IMF thinks one third of the world economy will be in recession  between today and the end of next year. The IMF does warn countries against wide ranging schemes of price controls and subsidies, worrying that these stop price acting as a signal to put in more capacity to increase supply, and blunting the impact of price on demand. They warn that long periods of price control and subsidy lead to shortages of supply, refusal to invest in new capacity, and black market activity.

They also rightly warn Central Banks both against too law a money policy to fuel the inflation, and against too tight a policy to produce a recession.

There have been various studies to try to gauge the different impact on CO2 output of electric versus petrol or diesel vehicles.

There is general agreement that making large  car batteries for the electric vehicle greatly adds to the amount of CO2 during the manufacturing of the new vehicle. The electric car may produce twice as much CO2 in its manufacture than the petrol or diesel similar  vehicle. The amount required to make the rest of the  vehicle apart from the battery is very similar for a comparable   vehicle with a different power system.

There is also general agreement that if collectively we scrapped diesel and petrol  cars early before the end of their working lives to replace with electric vehicles, that would generate more CO2 as a result of all the extra manufacture.

The degree of saving on running the  vehicles is also not a straightforward win for the electric vehicle. Clearly if the electric  vehicle is owned and used in a country that does generate all or most of its power from renewable sources there is a a considerable saving on CO2 from use. In practice most of the large vehicle using countries like China, the USA, Germany, UK still depend  heavily on gas and coal for generating substantial amounts of power, so there is much less of a CO2 saving from using an electric vehicle. If an electric vehicle is recharged from coal based electricity there could  be an increase in CO2 compared to a diesel of petrol machine.

It requires a driver to use the electric vehicle for above average miles each year in a country with a reasonable amount of renewable electricity in the mix for there to be a decent saving of CO2 from electric car purchase and use. When it comes time to get rid of the old battery of an electric vehicle that also generates more CO2 in its disposal. There are also  environmental issues about mining the minerals needed for battery production.

Some people argue that the UK has a duty to cut its CO2 output more than others because we generate a high level per head. The latest figures available on the Worldometer show that some countries do indeed generate far more per head than the average, but these do not include the UK. The highest figures  naturally come from the world’s leading exporters of oil and gas, but they also include large manufacturing nations like Germany and China, as well as some countries with high incomes per head like Luxembourg and the USA.

 

 

The figures provided on Worldometer below show that there are 19 countries with more than double the UK’s output per head, and there are many more above the UK including large economies like Germany, Japan and China.

Per capita emissions in tons   USA 15.5, Russia 11.44,Canada 18.58. South Korea 11.85, Saudi Arabia 15.94, Australia 17.1, Taiwan 11.72, Kazakhstan 13.01, UAE  23.37,  Kuwait 25.65, Qatar 37.29,Oman 19.61, Turkmenistan 14, Trinidad 25.38, Estonia 17, Montenegro 25, Luxembourg 17.5, Brunei  18, Bahamas 11,

UK 5.5 tons per capita.

Is it right that all countries with high output per head, say over 10 tons each, should be made to cut more than others? How do we allow for the need for the export of oil and gas from some producers to other countries who need these fuels pending the roll out of the renewables based electrical revolution?

Most forecasts believe the world will still be burning 100m b/d of oil in 2030, given the growth in fossil fuel based activities in the major developing countries.

If China cut her CO2 output to UK per head levels total world CO 2 output would fall by 7.5% or by 7.5 times total UK CO2 output. CO2 campaigners should turn their attention to China.  Those who want the UK to produce less CO 2 than current levels should support stopping more migrants coming here, as more people generate more CO2.

I receive a number of enquiries, often from students and schoolchildren, about net zero issues.  I am going to publish a few background pieces so these exchanges can be better informed.

The answer to the common demand that the UK leads the world in carbon dioxide reductions is that we are doing just that. The figures for the thirty years from 1990 reveal that of the major economies the UK has cut its emissions by far more than the rest of them.

 

Increase or decrease in output of CO2 1990-2020

China    +381%

India    +302%

South Korea  +129%

Brazil  +97.9%

Mexico   +40%

South Africa  +38%

Australia +38%

Canada +19%

Spain  – 7%

Japan  -8%

USA  -10%

France -27%

Russia  -30%

Germany – 37%

UK  -46%

These numbers should lead to some questions about the huge variation in achievement between differing countries.

China produces 30 times as much CO2 as the UK each year. If China’s CO2 output goes up 3.3% next year on the previous year  the increase in China’s CO2 is the same as the whole amount of CO2 generated by the UK. China plans to carry on increasing her CO2 until the end of this decade. Those who want to bring world CO2 down should as these figures show direct far more attention to China and India, the main sources of growth in the gas.

If the UK carries on cutting its CO2 by stopping producing its own oil and gas, and ending the manufacture of steel, glass, ceramics, aluminium, petrochemicals and other energy intensive products it loses us well paid jobs and tax revenues but it does not cut the world’s CO2 output. We import these items instead, usually increasing the amount of CO2 generated, at least by the extra transport requirement.

We also make ourselves dangerously dependent on imports of important items, which can be disrupted by wars, shipping problems or disease patterns as recent years have shown. It also widens the balance of payments deficit which requires us to borrow more or sell more assets to afford the extra imports.

All the time China and India carry on expanding their CO2 output it is difficult to see the world progressing to net zero.

This government was right to express concern about Treasury orthodoxy and should have added Bank of England error. Together these terrible twins visited on us the European Exchange Rate mechanism which gave us boom/ bust 1988-92, gave us the boom/ bust of the banking crash of 2006-9, and now threatens to give us the Quantitative easing boom/recession of 2020-23.  The government did need to cushion the blow of the energy crunch, and did need to offset the recessionary forces that have been unleashed by the surges in energy bills.

The Bank of England should take more of the blame for the slump in government bond prices from the Thursday of their rate rising statement through to the collapse the following Wednesday. Their decision to raise the official interest rate, to point to more rises to come and  their decision to sell bonds to drive longer interest rates higher was the main cause of the bond sell off. To avoid spooking the markets again when they end their temporary prop to the markets they should announce they will not sell any bonds at these depressed prices to reassure markets.

Meanwhile the Treasury has resumed its belief that economic policy has to be steered by a commitment to get debt as a percentage  of GDP down. In recent years pursuing this policy they have cajoled Chancellors to put in tax rises to do this. Instead a poorly performing economy has ended up with rises in state debt. The tax rises do not offset the extra spending all the time growth stays low. Last year when growth accelerated the deficit tumbled way below OBR forecasts.

The government should switch economic control to their growth target and the 2% inflation target. That  way we should allow lower tax rates as part of a growth strategy, and a counter inflation discipline that was sadly lacking in 2020-21.