John Redwood's Diary
Incisive and topical campaigns and commentary on today's issues and tomorrow's problems

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Inflation

The main Central Banks of the world have been very relaxed about inflation. They have all argued that as lockdowns end there will be a brief uptick in inflation, which will then subside. The USA has been particularly strong on  this view and has continued with massive dollar creation as well as ultra low interest rates to promote a stronger and quicker recovery. I have always thought they were overdoing it. The ECB has also persevered with a massive Euro creation programme, against more deflationary pressures in  the deficit countries. It is having the predictable inflationary effect on the German economy whilst supplying some boost to the usually sluggish Italian one.  The UK authorities started reining in  earlier than the others and run the risk of slowing growth too much. As a very import dependent economy the UK will import a lot of inflation from the others unless sterling strengthens more.

Some at The ECB and Fed and the Bank of England economist are now saying that maybe inflation is going to go higher and last longer than their institutions have been saying. There is a surprise! What did they expect given the volume of dollars the Fed decided to tip into the system? What should Germany expect given the scale of Euro creation going on? The UK has to beware that fuel inflation is going to be fast thanks to the unacceptable reliance on imported and spot market energy. There will be wage growth as the UK sorts out years of low pay in areas from farming through driving to catering where wages were kept down by many  migrants arriving to take the jobs. We face higher bills for transport, home heating and a range of goods that rely on gas for their manufacture.

The UK needs to work away at reducing its dependence on imports in general, and on imports with highly volatile day to day prices in particular. We have just seen a wild swing in the price of timber, where we import so much of what we need for housebuilding, for biomass power stations and for furniture. Given the passion to grow more trees, why dont we produce more of our own?  We have just had to import a large amount of very expensive gas to combat a shortage of wind in our power system. It makes little sense to pay top prices for imported LNG, dragged around the world in diesel guzzling tankers when we could supply more of our own under long term sensibly priced contracts. Why do we not put in  more gas storage while we are about it, so we can draw on stocks for any temporary high price shock?

The main Central Banks have talked themselves into a corner. If they now think they were too blase about inflation, they need to make sure their adjustments to the amount of money they create is not at the same time allied to rises in rates as this would likely tip economies into stagflation or even into recession. It’s a tricky path. The Fed has most to do to decelerate from a  very inflationary stance. The ECB has more excuse to wean itself off money creation more gently, as the southern economies are more sluggish. It will leave Germany suffering from a nasty inflation, needing to buy in a lot of foreign fossil fuel to keep the factories turning.The Bank of England has already announced an end to money creation.

Dame Lucy sees the need to help

I was thinking it  has been a poor time for leaks, when to my surprise the following intercepted memo appeared anonymously in my inbox.  It appears by keeping a low profile during turbulent Brexit times Dame Lucy has survived in the Cabinet Office.

From Head of Cabinet Office  Post Brexit renewal unit

To Professor Redmayne, Professor of European inequalities

 

Dear Karl

I need your advice to assist me in presenting to Ministers on how to tackle various supply chain and labour market issues which you will have seen in the media. As you will appreciate I worked very closely with the previous government to try to secure an Agreement with the EU that captured and retained all EU law and our single market obligations. This was  in accordance with the then  Prime Minister’s wishes to replicate many of the features of our membership to avoid changes and shocks. This work was altered by the change of Prime Minister in 2019 and by Parliament’s unwillingness to vote for the comprehensive partnership we had secured.

As the head of the new Post Brexit Renewal unit I need to give advice on how the government should behave towards the full body of EU law that is  now on our Statute books, and how we should negotiate if at all on the Northern Ireland Protocol and the transition over fishing. Looking at the situation it seems to me I need to point out that the UK does now rely on imports for some of its electricity and fuel, that it needs to respect EU law under the NI Protocol and should not be dogmatic about fish given the passionate concerns the French have about this minor industry. The government needs to understand the power of the EU and the legal  realities of the position they find themselves in.

It would be most helpful if as an external independent expert you could let me have background on the extent that the UK will need imported food and fuel over the next few years. A study of relative regional imbalances in EU countries and the UK would be topical given the debate here about levelling up. If it is your continued view that freedom of movement of workers and adherence to the common fishing, energy and farming policies and standards is best for the UK it would be good to have the case set out. I would expect you to have the contacts in and references from larger European companies who would take this sensible view.

There is a strand of Brexit commentary taking hold that thinks paying people at home more to take jobs that would otherwise go to continentals coming here under freedom of movement would be a good idea. They are also keen to rebuild domestic capacity in everything from food to fish and from energy to technology. Your help in explaining the difficulties and theoretical problems with this approach would also be a useful balance to the debate.

Some Ministers think there are easy Brexit wins from changing laws and cutting taxes like VAT on various products. We need to present the case against a race to the bottom and set out the  balance set by the growing body of EU law designed to protect the  single market and European values. They do not seem to understand that it makes sense to import more food, cars, energy and other items in a spirit of European solidarity, and to welcome EU workers here.

Given the prestige of your department and the important work it does I am sure we can come to some agreement on the scope and reward for this study that a Minister will approve. I will draft it around the twin themes of levelling up and post Brexit policy. I note that the Health department has recently agreed a study mainly of health  inequalities when the Treasury wanted a simple attack on waste in the NHS.

Yours

 

Dame Lucy Dolittle

More energy please

The Business Secretary seeks to reassure us that the UK will have plenty of cheaper green energy in due course. That will be very welcome. It will need to work with or without the wind blowing and the sun shining.  He also needs to check we have enough energy for the next decade whilst we await completion of these investments. Presumably they will need battery and or hydrogen and or water power storage of wind power. Recent experience has shown electricity capacity is tight when  the wind does not blow. Current gyrations in a world gas market temporarily starved of enough gas is causing real problems for UK users and for some electricity generators.

The truth is if you wish to have a steel, chemical, food, glass, cement, and other main process industries today you still need plenty of good value base energy from gas or some similar primary fuel. That is why Germany is busy negotiating to buy yet more quantities of Russian gas to keep her factories turning when she has little gas or oil of her own. It is also why she persists in mining yet more coal and  burning much of it despite the general advanced country agreement to phase it out quickly. That is how she maintains her status as Europe’s leading industrial economy.

The UK should be better placed. The UK has access to more gas and oil under its own geographical jurisdiction. The government now proudly tells us we produce half our own gas, but the figure needs to be higher. It is, after all, much greener to use our own gas down a relatively short pipe than to haul LNG half way round the world with all the extra fuel that takes to transform the gas and power the ship.

Last month with little wind the UK had to restart three coal fired power stations. Thank goodness those had not been dismantled and knocked down as the others had, as they helped keep the lights on. The government needs to ensure we have enough reserve power to run. Maybe it needs to convert  more to biomass which can provide stable power whatever the weather.

In due course we may have large scale battery or hydro or hydrogen storage of excess power generated by renewables on sunny or windy  days. We may have more reliable hydro systems. What we cannot rely on is imports in an energy short world. We should not  expect others to mine coal, burn gas and make things for us. The UK has to help find the acceptable energy and generate the necessary power, as we always used to. For many years we produced our own energy as an island of coal in a sea of oil and gas, with plenty of electricity capacity of a wide range of kinds.

The government for this decade needs to factor into the figures the progressive closure of most of our nuclear power stations which today generate around 17% of our electricity. In  due course there may well  be ways of making steel, glass and cement that do not need so much gas, and ways of heating our homes without the gas boiler. In the meantime we need to make sure we can cover our needs.

Health spending

In conducting the review of Health spending the new Secretary of state needs to pursue some of these questions.

  1. How much will the planned reorganisation cost?  What is the purpose of the abolition of Clinical Commissioning Groups and their replacement by Integrated Care Boards and Integrated Care Partnerships ? Will some  of the CEOs of the CCGs be appointed to be CEOs of the  new bodies?  Will they still be paid some redundancy payments or is there a clause which says if they maintain employment with the NHS there should  be no such payment? If the NHS decides to appoint former CEO employees in the reorganisation does it save headhunting and recruitment fees on those people? Are there planned savings from the reorganisation, and if so how much and when?
  2. Test and Trace. Test and Trace understandably was expensive in its first year when there were a lot of set up costs and provision of a large capacity in the face of an unabated pandemic. Current year spending of £15bn on T and T seems high. Surely next year there can  be a sharp reduction in T and T spending, with much of the cost now sunk, and with less need for capacity to man the system which can be  largely automated anyway.
  3. What are the forecast costs of the  vaccine programme against CV 19 going forward? Again surely there will  be substantial savings next year as most people who want to be vaccinated will have had two jabs and many will have had a winter booster as well?
  4. How much will be saved by not hiring in capacity from the private sector in the way the NHS did during the peak of the pandemic? How many treatments and operations will the private sector carry out for people willing to pay, relieving pressure on the NHS as private capacity is returned to that sector?
  5. What productivity savings are brought by the use of digital consultations and remote medicine?

The review of Health and social care leadership.

I am publishing tomorrow’s blog now, as the Health Secretary has just spoken to Conference and this provides some of the relevant detailed background for those writing about it.

 

In response to those of us who have asked how the new Secretary of State will ensure the extra money directed to the NHS will be used to raise the quality of care, improve access and get the waiting lists down, Mr Javid has announced a review of NHS and Care  leadership.

He has appointed General Sir Gordon Messenger and Dame Linda Pollard to conduct a review into how efficiency and innovation can be improved in the NHS and how regional inequalities can be reduced. As Health now has a massive £230 bn budget, absorbing all of our Income tax, CGT, Inheritance tax and Stamp Duty it is indeed to time to review how it can be better spent and to ask what another £12 bn can  bring that £230 bn cannot achieve. I wish to explore this in a few pieces and pass on my thoughts to the Secretary of State. I would have preferred the terms of the review to have been more narrowly focussed on quality and cost of care.

Let us begin by asking what can we expect of the two lead characters appointed?  I wish them both well and acknowledge they have had successful careers in public service. May they be wise and insightful in this task, stepping outside the frequent public sector wish to claim all is well and turn most arguments into one about how much extra money is required .Often the need is  to remedy defects in the way the base  budgets are spent.

General Sir Gordon can draw on the talents, bravery and discipline our soldiers show, and their ability to improvise and respond quickly when on active service. He was decorated for his personal bravery in leading troops in action. I hope he has also learned from some of the failings of MOD and senior army management. There is a long history of big budget overruns and delays when buying equipment. The use of the rank of Lieutenant Colonel paying around £80,000 a year for 1510  senior officers in a service of 82,000 armed personnel  does not look like slim management. There are 590 more  officers of ranks above Lieutenant Colonel  to fill the main national management roles.

Dame Linda Pollard can draw on the example of the bravery, hard work and versatility shown by the front line NHS workers handling serious covid cases over the last year and a half. The Leeds Teaching Hospital she chairs  was last rated as  Good by the Care Quality Commission. It did, however, receive criticism for safety which needed improvement. It failed to meet performance standards for referrals to treatment – i.e. too many people waited too long. Its emergency readmission rates were above the national average meaning more remedial treatments were needed. Its staff cost per unit of work were lower than average but its non staff costs higher. I would be more reassured about her advice were Leeds to have an outstanding rating for safety and quality of care, and were it not to have issues in getting waiting lists down.

The media did not seem to report any of this, saying the review was an attack on waste and wokery. It is not quite what the announcement says. I do think the Secretary of State needs to sit down urgently with the leading CEOs running the NHS in England to get them to identify what they need to do to get waiting lists down, the prime current objective. Of course this also entails performance criteria for quality of treatment and cost. His own performance monitoring system which is very detailed by CQC should help him decide which of the senior CEOs are  good, which need to be mentored to improve  and which if any need to be removed for continuing poor results.

We need to pocket the Brexit wins

It is true NHS spending is up by £1200m a week over the last two years, well ahead of £350 m illustration on the side of the Brexit bus as we save on our contributions to the EU.

Its also true we developed and rolled out a new vaccine ahead of the EU approving and importing US vaccines, thanks to the flexibility Brexit provided.

Meanwhile we await more Brexit wins. When will the government abolish VAT on green products like heating controls and insulation which the EU made us tax?

When will they ban industrial trawlers of over 100 metres length to safeguard our fishery and help our domestic  industry?

When will they abolish the Ports Directive and introduce our new Freeports?

When will they restore the Merchant Shipping Act struck down by the European Court to help rebuild our merchant fleet?

When will we get a new Agriculture policy which redirects subsidies to stimulating more domestic food production?

There are many more Brexit wins which the government should bring forward. I spoke about these yesterday.

 

The future of Conservatism – extracts from a speech to the Bruges Group at party conference

The stage is set for a post Covid recovery. Adopting a Conservative approach to liberty and prosperity is the best way to promote the greater happiness of the greater number.

Anti pandemic policies damaged incomes and jobs and removed many freedoms. The first task is to restore all our lost freedoms so the quarter of our economy that was effectively closed down can flourish again. The successful vaccination programme should give us the scope to relax, leaving it to each individual to judge how much exposure they want to others given the risks.

The second task is to make the case anew for work as the best means to banish poverty and improve life styles and chances for  families. Conservatives have done more than the socialist inclining parties to advance prosperity, because we recognise it comes primarily from enterprise and effort by  millions of people and hundreds of thousands of businesses.  Markets generate choice and opportunity. Profits reward those who venture their capital and put in their effort, and help pay for the new investment employees and consumers need . Prices fluctuate to  bring forward more supply where needed or to reduce output where the popularity of the product or service is waning. Governments must allow price systems to send their signals.

Markets are not cold impersonal enemies of the many . They are the way we all have choices of what to buy and where to work. All humanity participates in the market. Of course Conservatives believe that the state needs to step in to help those in need, to support the ill and disabled, to prevent monopoly exploitation or market abuse. Conservatives believe in the rule of law to keep people using markets honest. We also know that public sector monopolies that charge customers  also need taming to avoid poor service, high cost and no choice that we used to get from nationalised industries.

The immediate need to is to get some tax rates down. Lets forget the National Insurance rise, the tax on jobs. Lets relax the IR35 rules so they do not stop people developing self employed businesses. Lets take VAT off domestic heating and insulation products.  Lets offer a tax boost to those who will substitute home grown food, home produced gas and home produced timber amongst other things for the large import bills we currently pay and all the extra energy cost of long haul transport.

Let’s help more people on their personal journeys with great education, better training , and easier access to buying a home and setting up your own business.

China’s warning

China has decided to suspend her not very demanding emissions targets as the country needs to keep the lights on. In a major reversal just before COP 26 the world’s largest producer of CO2 has had to urge full out production and purchase of coal to generate power. Any idea that the creator of 27% of the world’s manmade CO2 was about to reverse the growth in her carbon output has been forced out by the reality that she needs coal to keep the factories turning and the homes heated and functioning. In Germany the CDU is trying to keep coal alive until 2038, with the CDU government in the Rhineland approving new large strip mining activities, owing to the unreliability of wind power on the German system.

Governments keen to decarbonise need to recognise that their prime duty is to keep the lights on and the factories working. It is not a good look  to end up with emergency power cuts and the need to dash for coal to avoid disaster. Our very sophisticated societies, hospitals, schools  and homes rely completely on electricity to power them or to operate the controls, lighting  and communications. It is even more important now to have enough capacity for all conditions and eventualities.

I repeat my request of government that they make putting in more electricity capacity an urgent priority, choosing methods of generation that balance the current mix and provide resilience. I also want to see us produce more domestic gas and biomass materials to cut the costs and fuel use currently taken by importing LNG and wood pellet and to add to our options for power generation.