Part A

Part B

I am all in favour of the government spending money to obtain high quality health and education services, to ensure our country is properly defended, our law upheld and all those in need offered financial help. Governments understandably concentrate on making announcements where they are planning to spend more, and claim that the mere fact that they are spending more means things must be better. Opposition parties from the left of centre encourage this thinking and usually oppose on the grounds that not enough is being spent, making it impossible for things to be better. A badly run part of the public sector will usually blame a lack of cash rather than any error of policy or misdirected effort on their part.

This budget needs to go beyond stressing where the government is spending more, to examine where it can spend less or where it can spend to better effect. It needs to remind us all that simply spending more cash can be inflationary, or can fail to deliver what is wanted. Higher public sector wages are often desirable but need to be offered against a background of working smarter. They are affordable if backed by productivity gains, they might prove to be inflationary if more money chases the same output.

There are many areas where spending can now come down. The government is rightly ending the Furlough and other special income support measures it brought in to handle lockdowns. It needs to come up with a new plan for the railways to avoid spending a subsidy fortune on sending many nearly empty trains around the country to service patterns of work demand that have disappeared with the homeworking revolution. The government will doubtless think it too late to cancel HS2, but its poor business case has just been undermined more by the big reduction in passenger rail travel. The railway can be repurposed for more freight travel, to contribute to the green initiatives and to take lorries off congested roads.

In the health budget the huge sums committed to finding a vaccine, setting up a vaccination programme, designing and implementing a test and trace system, and putting in more testing capacity can in part be redeployed to getting waiting lists down and doing the day job as the pandemic wanes. There will also be the saving on putting in and then closing the extra Nightingale capacity. All of these sums stay in the overall budget and are rolled over for the years ahead as if these commitments would repeat.

In areas like energy, transport and housing where we need more capacity we can finance more of these through private sector investment.

The sooner the government stops illegal migration and regulates economic migration at sensible levels the better. Everyone we welcome to the UK needs a major investment in housing, public services and transport infrastructure to make their lives decent. Reducing these pressures would ease budget difficulties in several areas.

Modern Central Banks ironically do not think money matters. Most of them no longer target money supply, and many provide little or no commentary on it. This is surprising given the fashion they entertain to create more and more money to tip into circulation. They should understand that if you create more money and all else stays the same prices will rise, as more money will chase the same volume of goods and services. That is why money matters.

I guess their response is that as  they create massive new amounts of money the velocity of circulation, the amount of use people make of that money, will fall. So it need not be inflationary. It is true that in the short term in the pandemic lockdowns more money was an offset to the collapse of demand, and use of the money tumbled as many people  and companies hoarded what new found cash came their way.

It did however have a first round inflationary effect, as it was planned to do. It inflated asset prices, pushing up the price of government bonds which the money was  used to buy. The people who sold the bonds to the Central Banks then often bought other assets like shares with that money, pushing their prices up even more than the  bonds. So far so good. The governments could borrow loads of money on the cheap, and the inflation cheered up anyone with assets and did  no harm to those without. I supported a vigorous Central Bank response to offset some of the worst economic consequences of the anti pandemic measures. I also thought governments would get away with a massive one off increase in borrowing, financing it at very low rates, all the time activity was so depressed.  There did need to be a  big offset and rescue packages given the economic severity of the policy.

If you carry on creating more and more Central Bank money to keep government borrowing rates low there becomes more danger that the money will start to find its way from asset markets into creating demand for goods and services. All those extra savings people made during lockdown as they saved their going to work costs whilst still banking their pay could be spent in a rush, driving up the velocity of money use.  If commercial banks use the extra cash they have to expand credit that too creates more demand for goods and services. By these means more created money can lead to goods and services inflation if the money starts to create more potential demand than there is supply.

Central Banks in the USA, UK and the EU should stop their money printing and bond buying now to reduce this risk. They and the other bank regulators should ensure total money growth is sufficient  to  allow decent growth without encouraging too much extra inflation. That can best be secured by setting appropriate levels of permitted lending / balance sheet strength for the commercial banks using their existing powers. States should continue to cut back their deficits and borrowing substantially by promoting growth policies which will swell revenues and cut crisis spending.

Since I and others raised this in the Commons last week during the passage of the Environment Bill the Minister has supplied additional information about how they are proposing to get rid of bad discharges to rivers as we all want:

• “Between 2020 and 2025, water companies will invest £7.1bn on environmental improvements in England.
• Of this, £3.1 billion will be invested in in storm overflow improvements specifically.
  • We have also made our expectations crystal clear in our draft Strategic Policy
  Statement to Ofwat where, for the first time, the Government will tell the industry’s
  economic regulator that we expect water companies to take steps to “significantly
  reduce… storm overflows”, and that we expect funding to be approved for them to
  do so.
  • In August 2020 we established the Storm Overflows Task Force to bring together
  key stakeholders from the water industry, environmental NGOs, regulators, and
  Government in order to drive progress in reducing sewage discharges.
• The Task force has agreed a long-term goal to eliminate harm from storm overflows.
  • We have committed to reviewing the case for implementing Schedule 3 to the Flood
  and Water Management Act 2010 in England, which would set mandatory build
  standards for sustainable drainage schemes on new developments, and which
  many have called for. This action has the potential to markedly reduce quantities of
  water unnecessarily entering the sewerage system.
  The significant action I have detailed will deliver real reductions in the harm caused.”

The Chancellor tells us he believes in low taxes. In that case he has work to do. Let him prove his point in this coming budget.

First, abolish the tax on jobs he proposes for April with his National Insurance surcharge. The advisers who told him he needed to raise an extra £12bn next year, have now told him he has already raised an extra £46bn in tax in the first half of this year thanks to tax cuts and recovery.  Their revenue forecast was that much out between March and September! Let’s stick with a winning formula of lower tax rates and more revenue.

Second, end the attack on the self employed by cancelling  the changes to IR 35. We need all the enterprising and self employed people we can get to power recovery and change the economy.

Third, remove VAT from green products. The government claims to be the greenest ever, so why charge VAT on boiler controls, on insulation, draught proofing and various other green energy products?

Fourth remove VAT from  domestic fuel to offset some of the large rises in price brought on by the gas shortage. The gas price rise will act as a tax on consumption, cutting growth.

Fifth end the threat of higher corporation tax rates

Sixth, consult on setting the new world Minimum Corporation Tax rate to offer some tax competition to Ireland.

If he did these things he would indeed be a lower tax Conservative., He would also collect more revenue and have a lower deficit because the economy would grow more.

The Budget this week will doubtless be damaged and misdirected by wrong official forecasts. The Office of Budget Responsibility is meant to be independent, yet Chancellors seem obliged to use these forecasts and defend them. Given how wrong they usually  are it places the government in a false position and misleads them over what is the proper policy response. Indeed, it leads officials to recommend advice which will slow the recovery and worsen the outturns.

The OBR and Treasury officials are wedded to Maastricht austerity economics. They slavishly publish the UK’s position against the Maastricht debt and deficit criteria as if we were still in the EU and had to comply with the Treaties. They will doubtless inveigle the old Maastricht debt and deficit requirements back into a so called new statement of economic policy aims and controls for this Budget  despite Ministers rightly wishing to review the framework.

If you are going to steer economic policy around debt and deficit figures you need to be able to forecast them accurately and understand what actions balloon deficits and which ones reduce them. Last year I drew attention to the wildly pessimistic budget deficit forecasts. The outturn was first published as an overstatement of a massive £90 bn in the deficit, even larger than I had dared to suggest.  It was subsequently adjusted down to £64 bn  by proposing that there will be  some hidden losses yet to be determined to add to  last year’s figures. I repeated the claim that this year’s budget deficit was also substantially overstated. At the half year stage it turns out the deficit was overstated by a whopping £43 bn  in just six months.

The main reason is the OBR and Treasury underestimate the buoyancy of revenue in an upswing, and have false models of tax revenues which depress revenues when you cut rates without allowing for behavioural effects which increase transactions and output  with lower rates. Thus we see that in the year to date Stamp Duty has risen by a massive 85% thanks to a mixture of unlocking and the lower tax rates the Chancellor wisely introduced. Corporation Tax is up 20% despite the Chancellor  offering a super deduction for investment which officials are nervous about reading their latest published report.

The Chancellor should announce a strong commitment to low inflation, underlining the 2% inflation target which we are currently breaking. He needs to target tax cuts, regulatory actions and government procurement on scarcity areas where prices are under upwards pressure and offer supply side reforms to boost capacity. Energy, transport, domestic food growing, domestic timber and others are obvious areas.

There should then be a growth target, to send a clear signal to all of government that there is work to be done to boost the growth rate and the productivity rate with great education, training, network investments, incentives for the self employed and small businesses and innovation.

The state debt is currently stated as £2.2tn or 95% of GDP. As the state will own £875bn  of the debt by year end the true figure is £1.325 or 57% of GDP. This is a manageable amount at current low interest rates. Because the OBR grossly overstate the deficit they will demand tax rises which will slow the economy , damage  confidence and impede  rectifying supply shortages.

( text amended to include all QE to date, not just more recent)

The 26th COP conference to save the planet takes place in early November. Like its forbears they tell us this is the last chance and that much is riding on the results. Clearly they are right that as the previous conferences have not agreed sufficient action to even begin reducing the total carbon dioxide produced in many places nor to start to cut the total amount of fossil fuel burned around the globe  this conference needs to be more successful than past ones to wean the world off fossil fuels as they wish.  World oil demand at 85 m barrels a day in 2006 is forecast to exceed 100m barrels a day again as world recovery from the pandemic continues, and to stay there for the next decade.  As the Conference approaches we are told that it will  be an extremely difficult task to get an Agreement. I would be surprised if it is allowed to break  up without one. I would also  be surprised if it is the last such conference, declaring job done. In practice the world is nowhere near getting to net zero any time soon all the time China, India, Brazil, Pakistan, Bangladesh and other heavily populated countries see the need to burn more coal, oil and gas to grow.

The UK as joint chair with Italy has set out four crucial areas to get agreement – coal, cars, cash and trees. They will  need to negotiate the question of grants and loans from the rich countries to the lower income countries, as they are making this an essential part of co-operating with the general green revolution. A recent meeting of the 20 country strong Like Minded Developing countries (includes China, Saudi, Pakistan, Malaysia, Bangladesh) issued a tough communique saying the advanced countries as a whole needed to cut their carbon output more quickly as they had put plenty of carbon dioxide into the atmosphere during their industrialisation. The rich countries needed to  be tolerant of the developing world’s need to grow using fossil fuels, and to offer far more financial support for green transition by them. They pointed out that many developed countries had failed to make their full contribution of cash under the Paris promises, and had not met their own carbon dioxide reduction promises either.

It seems likely the Conference will have to proceed without either President Xi, or President Putin being present. China is by far and away the largest producer of carbon dioxide, at 28% of the world total, and Russia is in fifth  place at 4.5%. It now seems likely Prime Minister Modi of India, in fourth  place with 7%, will attend but it is unlikely he will be able to pledge cuts in Indian use of fossil fuels and will understandably want more financial support. China and Russia will send delegations and will offer national plans of sorts, but they will fall far short of what green campaigners would expect. There is unlikely to be an early phase out of coal by emerging countries, with China aggressively adding coal mines and coal power stations to her energy mix.

It will  be easier to agree more trees, though difficult issues remain in parts of Latin America and Asia over cutting down forests to grow crops and graze cattle. Everyone will  be sympathetic about electric cars.

The central Agreement will therefore rest on further pledges of progress from the world’s second and third largest emitters, the USA and EU. The UK will assist as the one larger  advanced country that has already done the most to cut its own carbon dioxide output. Getting a better commitment from Germany to cut out coal would help them. There are rumours that a possible new coalition government there might want to bring forward the elimination of coal from 2038 to 2030. The EU will doubtless find it more difficult to get an improved commitment from Poland, another large coal user.

Without larger and faster contributions from the first, fourth and fifth largest producers of CO2 in the world it is going to take more such conferences to chart a reliable path to net zero for the world.