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

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Having a proper debate on the economy

Parliament has failed to have a proper debate on the economy for many years. The main reason is that¬† it has fallen for the lie that the Bank of England is independent. Because many commentators and politicians think that they fail to debate the crucial reliance we have had on the Bank printing loads of money and keeping the government’s borrowing costs very low. The Opposition keeps off all matters that the Bank is involved with and wishes to blame the government for any economic failing in a way which reveals a deep misunderstanding of how the modern Treasury and Bank work together.

Let me have another go at explaining. The Bank under the last Labour government at the end of its time in office, under the Coalition and under the more recent Conservative government has relied primarily on printing more money and buying bonds to keep rates low. There were times when this was the right policy, most¬† notably in 2020 to offset some of the bad economic consequences of lockdown. There were times when this was a bad idea, as with continuing it throughout 2021 when it was bound to be inflationary. The crucial thing about this central economic policy is it is a combined responsibility of the Chancellor and the Bank. Indeed, the Chancellor not only has to give approval for the Bank’s recommended money printing, but he has to underwrite the Bank against losses on the bonds it buys. So far the Bank in several bursts over the last thirteen years¬† has created and bought up bonds to the value of ¬£895bn.

Despite these enormous moves, Parliament has preferred to argue about the odd £10bn of spending or savings either way in a succession of budgets, or to laser in on individual  spending programmes arguing over whether they are a few billion too light. The recent centre of the national debate has been £12bn of extra tax in a £2.2 trillion economy. The Treasury absurdly argued they needed exactly £12bn extra for social care and health, when they overestimated public borrowing for last year by a stonking £95bn. As they did not have much of a clue about how much revenue existing taxes would bring in it was a particularly precise nonsense to say they needed £12bn. Then in the Spring statement they decided they did not  need a third of that £12bn after all so they raised the threshold before you pay national Insurance!

Such a pity we did not debate the £895 bn and its more recent inflationary impact. The  Treasury says the  Bank is independent and is responsible for controlling inflation. Now the  Bank has visibly failed to control the inflation or to even predict it until  recently maybe  we are due a proper debate about economic policy.

Economic forecasts

The latest IMF forecasts show the UK economy going from being the fastest growing economy last year to be the slowest of the advanced countries next year. The IMF is more pessimistic than the OBR/Treasury  for 2023 and is more likely to be right. The OBR/Treasury model usually underestimates the impact of permissive monetary and fiscal policies on the upside, as it did last year, and is too optimistic about the resilience of the economy to tight money and tax hikes on the downside. Last year I predicted a much lower deficit and higher tax revenues than the official estimates at the time of the budget and was pleased to see that happier outturn come to pass.

The IMF says the UK economy will be slowed from 7.5% in 2021 to just 1.2% in 2023. That should be no surprise to anyone watching policy developments. Last year the Bank went on printing extra money all year, long after it should have stopped. This year it will be printing none. It is in danger of hiking rates too high to contract things more. Last year the Treasury planned  for a lax budget deficit. This year it is trying to get a lower one through large tax rises. This will sandbag growth which in turn reduces buoyancy of revenue. The OBR model still does  not capture the full sensitivity of tax revenue to growth rates. Both these policy tightenings come on top of the large hit to real incomes being administered by energy and food price inflation. The high inflation is both the result of past laxity in money growth and the global supply hits to the world economy.

The collapse of the GFK Consumer confidence index to minus 38 should be a final warning to the Treasury. This takes it down to a level lower than it hit in 2020 over lockdown, lower than during the Exchange Rate Mechanism recession and almost as low as the great recession and banking crash of 2009.

One of my critics wants clarity about my forecasts. I am always clear about them. I do not have a model of the economy myself, but study the official models and offer adjustments to their results as they are flawed in ways I have described. Just as last year I forecast a lower deficit and more tax revenue, for  2023 I forecast a lower growth rate for GDP and a worse situation on revenues and deficit than the OBR figures. I urge the government to abate its large tax rises which are the main reason the IMF figures put the UK in bottom place next year. The other main advanced economies have the same pressures from  higher inflation as us, and the US, Canada and some others  will have a substantial monetary tightening to contend with but do not have the big tax rises. The European countries need tighter money to curb their inflation and may get it later this year.

Ask Councils about roads

 

We all need roads. Many need to drive to work, drive to take children to school, drive for the weekly food shop and drive to leisure and social events. In most U.K. communities car use is required by the geography and the transport system.Only in large cities are there mass transit systems with frequent services.

Those who claim to be greener because they have found safe cycle routes for school or work, or do have good trains or are close enough to work and shops to walk there still need roads like the rest of us. They need the diesel lorries to restock the shops, they need the on line delivery driver, the plumber and the builder to get to their  homes by van . They would need an emergency vehicle to arrive if bad fortune struck them. The environmentalists that go by bus need good bus sized roads to have their way.

All but our main motorways and trunk roads are local Council monopolies, provided free to all users on the back of national and local taxation, supplemented in some places by user and environmental levies. Local elections are a good time to engage with Councillors and candidates about what they are going to do to make the roads safer and easier to use, and to bust congestion and delay which disfigures many of them.

As I travel around the country I come across many Councils  that are out to get the vehicles off their local roads. They spend all too much money on narrowing usable roadspace, worsening flows at junctions and crowding too many different instructions and restrictions into too little road. In future pieces  I will look at how Councils could  help make our journeys easier and safer, and how they could back more use of alternatives without worsening vehicle use of their roads.

 

 

 

 

 

 

 

 

 

 

 

 

Controlling public spending

There is renewed interest amongst Conservative MPs in value for money and controlling public spending. We have just lived through an extraordinary two years when public budgets were increased hugely to combat the virus, find a vaccine, set up a nationwide free test and trace system , boost benefits, pay furlough  incomes , subsidise businesses facing impaired trading and offer finance to business in difficulties from banned or restricted trading.

The first part of controlling spending is reversing all of these special  measures as the  economy  has now returned to its pre pandemic levels. This is largely done though the NHS budget needs to be fully adjusted to ensure enough of the expanded budget that remains goes to non covid work and to waiting  list reduction. As answers to my various questions have shown the NHS needs to do more to have a good manpower plan going forward, to recruit the extra  medical staff it needs to handle demand. It may need more beds just as I and others strove to get to handle the first covid wave  through the Nightingales.  It needs to reduce overhead and concentrate resources on the medical services at its core. Much of the task of raising productivity in the public sector, raising service quality and improving value for money needs to come from this crucial service which absorbs 40 % of the state budget.

The government should urgently review overseas aid to eliminate payments to countries supporting Russia and countries with space,nuclear weapons or other large armaments programmes.

The costs of providing initial  housing and other public provision for refugees should be charged to the overseas aid budget. The number of economic migrants should be controlled to allow a reduction in spending on additional social housing.

The government must work with the railway to make substantial reductions to the current very high level of subsidy. The Secretary of State is right to try to promote more use of the railway. The  U.K. will need to be realistic about ticket prices after his initial bargain promotions. It may be that more freight use of the railway is the quickest win for revenue and beneficial environmental impact, reducing road congestion.

The Cabinet Office Minister Jacob Rees Mogg is right to seek a slimmed civil service. Ending much new external recruitment , promoting from within and eliminating  posts would save substantial sums and boost productivity.

Controlling inflation

One of the principal misunderstandings of the Treasury is embodied in their comment¬† in the Spring Statement that “The Bank of England is responsible for controlling inflation”. It is a¬† very worrying mistake. The public thinks the government is in overall charge of the economy including the need to control inflation. The main policy the Bank has pursued in recent years which has triggered the inflation is the policy of printing loads of pounds and buying up government debt with them to keep the interest rates very low. This policy has to be approved by the Chancellor of the Exchequer himself on advice from Treasury officials. The Treasury is part of the¬† wider government which controls around 40% of the economy through public spending. Government gets to set the prices, charges and taxes to pay for most healthcare, education, policing, defence and a range of other services. How it does this will have a direct impact on inflation.

The Treasury needs to see the 2% inflation target as a serious requirement binding on itself as well as the Bank. It needs to work in conjunction with the Bank to achieve it. The Treasury should have objected to the scale of quantitative easing being proposed last year when it went on for too long. It was a good response in 2020 to counter some of the damage of  lockdown.  It now needs to avoid increasing taxes at exactly the point where the Bank is tightening money and where the gas and oil markets are imposing a huge levy on consumers which is akin to a big tax rise. The economy will go from fast and inflationary growth to slowdown as a result of these important changes of direction. There is no need to overdo applying the brakes after a period of speeding.

The Treasury still promotes the idea that the Bank Рand the OBR Рare independent and that this guarantees good outcomes. As we can see, they are currently allowing or producing a bad outcome on inflation, which is way higher than their forecasts of a year ago. If they are independent and responsible then we should be asking why the big mistakes?  It is also a mistake that they are independent. The Bank requires  support in the form of a Treasury guarantee of its bloated balance sheet and needs Treasury approval for its main  money policy instruments. The OBR works just for the Treasury and clearly has a series of privileged conversations with Treasury officials before Budget leaving scope for each  to influence the other as they work on their parallel documents to be published simultaneously.

Brexit wins

My article from Conservative Home

It is good news that Jacob Rees Mogg has been appointed minister for ensuring we take advantage of the freedoms and opportunities of Brexit.

He is going to have a struggle to do so, as he faces a Whitehall with too many senior officials at best wanting us to mirror the EU as they like what it does, and at worse determined we get no wins so they can prove their pessimism justified about the whole policy adventure.

I have found it extraordinary just how much concerted pressure amongst the official and legal establishment and the House of Lords there is still against the whole idea of Brexit.

Let us begin with the Treasury. It was Treasury officials led by the Chancellor at the time of the referendum who came up with an embarrassingly bad set of forecasts of what would happen if we dared to vote for Brexit and leave.

We now know for sure their forecasts for rising unemployment, a mass loss of City jobs, a big increase in unemployment, and a collapse of house prices were all the reverse of what happened.

In the year after we finally left the single market even the pound rose against their forecast of a fall. It had been down and up in the period after the vote. Interest rates fell instead of rising as forecast.

One of the big opportunities from Brexit was to take VAT off items we did not want to tax, or to lower the rates where the EU ones were too high. The Treasury has stuck to EU VAT rates like glue. When it was eventually talked into the obvious move of taking VAT off green products, the EU moved to claim they now would allow that in an effort to deny a Brexit win.

The UK still refuses to suspend VAT on domestic fuel which should be a no brainer given what is happening to the price of gas and electricity. It should be suspended until gas and oil prices have fallen back again.

Some in the Civil Service also think the Northern Ireland Protocol prevents us changing VAT in Northern Ireland which is used as another excuse not to change it in Great Britain either. Instead it should be a stimulus to clarifying in UK legislation that of course we can control VAT everywhere in our country now we have left the EU.

Not content with trying to stop VAT changes, the Treasury has also been keen to block proper deregulatory and tax advantages in the programme of freeports. Again this should have been an obvious win.

The Treasury, now led by a Chancellor who championed freeports as a backbencher, should have had a generous freeport package ready and working for our first day out of the EU. Instead we are still awaiting full roll out and a comprehensive set of advantages.

Over at DEFRA there is also a marked reluctance to diverge and take the wins available. Our fishing industry still remains damaged by a further, needless, transition designed to help large predatory foreign vessels.

The Government should legislate for a British fishing policy that is kinder to our fish and fishermen and women. Our fishing grounds need respite from the mega trawlers, all foreign owned, that hoover up too much fish, which we could do by banning trawlers over 100 metres and damaging equipment.

The Department should have a more active policy to support the expansion of our domestic fishing fleets, with a larger UK quota whilst allowing the rebuilding of stocks. The funds to lend and grant for larger British fleets need increasing.

Defra too does not wish to put in place a good plan to grow more food at home. The Common Agricultural Policy slashed our domestic output and made us ever more dependent on continental fruit, vegetables, dairy, and meat.

Orchards disappeared with EU grants to root out the trees. We were the one country with a milk quota smaller than our domestic demand. Our beef industry was restricted for a long period. The Dutch flower and market gardening industries gained advantage over our own and took large chunks of market share.

Defra now needs to put that right. It should have loan and grant schemes for more and better food production and for productivity.

The Business Department has been wedded to the idea that the UK should exit the fossil fuel business in order to rely on increasing amounts of energy imported from the continent. This is a particularly dangerous policy as the continent is very short of fossil fuel energy whilst we have good reserves.

In due course, we should be able to resolve the issue of how to keep the lights on when the wind does not blow and the sun does not shine through batteries, green hydrogen, pump storage and other technologies.

The reality is however that for this decade most people will still be heating their homes with gas or oil or solid fuel boilers and most people will be travelling by petrol or diesel car or van or truck. Most process industry will rely on gas.

In this circumstance it is madness to rely on imports when we can produce our own. Instead of the Energy Department being the department for importing energy, it should vigorously promote more British energy. Instead of being the ministry for more interconnectors to make us dependent on an energy-short continent, it should be the department of British energy opportunity, with pipes and cables for the domestic market linking home supply to demand.

The Business Department whilst it is about it should also become the department that promotes and helps more British industrial output instead of being the department to import more.

Importing our steel and aluminium, ceramics and cement does not save the planet by cutting world CO2 . It boosts world CO2 by the extra it takes to transport these products, and sometimes by the dirtier processes used abroad.

The economic shock of tariff free trade in the 1970s when we joined the EEC accelerated the decline of heavy industry in the UK under both Labour and Conservative governments. Now we can set our own corporation tax, carbon tax, energy taxes, rules and support schemes and the rest, BEIS should be pricing good UK-based industry back into the market.

In the wide-ranging area of regulatory standards and requirements the UK now regains her voice at the global high regulatory tables. We are in a good position to guide more world standards, and to choose standards for ourselves that protect us as needed but also allow us easier access to Asian and American markets.

We want high standards for employees, high safety standards, high standards for animal welfare. We also need to remove bad or over cumbersome regulation to allow enterprise, competition and innovation more scope to offer better deals. The Government could begin by producing a better and less bureaucratic regime for data.

The Northern Ireland Office needs to respond to the anger in Ulster over the way the EU has interpreted an ambiguous and sometimes contradictory Protocol to damage the British internal market. They need to take up the idea of mutual enforcement, offering the EU protection from non-compliant products from the UK in return for no restrictions on NI/GB trade above the checks and controls we have on trade within England or Scotland.

I could give many more wins from Brexit, but space does not allow.

The Church of England turns its fire on England

 

It used to be said unhelpfully that the Anglican Church was the Conservative party at prayer. As a once ¬†well attended national Church it needed to be and was more inclusive than that. It was true that in the last century many Conservative MPs, ¬†Councillors ¬†and voluntary workers swelled congregations alongside people of other parties and the non political. Today more Conservatives stay away, knowing they are not welcome. The Church which failed to oppose Labour’s policy of creating a hostile atmosphere for illegal migrants switched to opposing the same policy from Mrs May, a keen Churchgoer herself. Today the Church of England seems to favour Extinction Rebellion and the crusade against CO2 ,the resurrection of U.K. membership of the ¬†EU and proportional representation. Its national leaders encourage a hostile atmosphere for Conservatives and the English majority.

Last summer the Archbishop of York lectured England that it needed to be broken up into governing regions on the EU model. He had failed to notice the referendum vote against an elected government of the North East, or the hostility of many English Leave voters to the way the EU insisted on trying to break up our country by denying England any place on the map or in the constitution of their  Europe. I asked him to debate the matter with me as a fellow Parliamentarian. He could not even be bothered to send me a personal reply to decline the opportunity.
The Archbishops should remember the history of the Anglican Church.The Church tolerated different views of the once explosive issue of transubstantiation. It left most sensitive items of belief to individual judgement and inner conviction. The Church did a good job opening up the Christian message to the masses with the bible in English and the great language of the James Bible and the Elizabethan Common Prayer book. The Reformation which created the Anglican Church was based on a rejection of the courts and government from Rome. The dissolution of the  monasteries was a welcome social and economic revolution connecting more  priests with local communities.
It is possible to be  more critical of the failure to follow the surge of urban populations in the nineteenth century when the break away Methodists and other non conformists served congregations and added greatly to hymn books  in the absence of interest from the mother Church. More recently I see bishops using their privileged positions in the Lords to back European and regional causes voted down by a majority of voters.

If the Archbishops ever want to win back lost congregations they  could try being  more positive about the country they serve.

 

I do not want the Church to preach Conservatism from the pulpits nor to agree with all a government does. I just ask that national unelected  Church leaders with seats in theLords show some sympathy with majority views and some  understanding of why their congregations have shrunk so much.

 

 

There is too much international regulation

There are three main problems with excessive international regulation. The first is it can curb competition and innovation which would otherwise improve service and performance. The second is countries like the U.K. take compliance seriously only to see many other countries gain exemptions  or simply ignore the rules to gain competitive advantage.The third is democratic governments charged with the domestic task of lawmaking find an increasing number of areas where they cannot change, improve or repeal as they and the publics they serve wish owing to international agreements.

Some have written in here to condemn new global rules on pandemics from the World Health Organisation. There is no agreed new Treaty nor even a text of new Treaty for negotiation so that is no immediate threat. Many countries will doubtless be reluctant to surrender powers to lockdown or not lockdown to supranational unelected officials. There needs to be plenty of world debates about what if any strengthening of global rules might be helpful and acceptable to enough signatories.

I read that some in U.K. government think the U.K. should adopt forthcoming EU regulations on speed limiters in cars. I can see no good reason to do this given the technical problems with variable speed limits, difficulties in tracker devices knowing exactly which road a vehicle is on at complex junctions, and with temporary speed limits. Ministers must tell the civil service we have no wish to adopt new EU rules in most cases. New rules should only be formed when the U.K. public and Ministers think there is a problem which regulation could help solve.

Why don’t the railways want our business?

It’s the Bank holiday week-end. Many people want to travel to be with family or friends. Others want to take a short break at a UK holiday destination, giving some work to our hotels, visitor attractions and restaurants. An effectively nationalised railway which is heavily loss making has an opportunity to provide us with a great public service. It could take some of the strain off the roads. It could earn some much needed extra revenue to offset some of the huge losses it is racking up and expensing to the taxpayer.

Instead the papers and media report a long list of closed lines and services. Maybe when the railway earned most of its non subsidy money from fleecing commuters for the their five days a week¬† service it made sense to do maintenance at Bank holidays when the commuters did not need the travel. Haven’t the railways noticed the five day a week commuting model is broken. We have witnessed the post covid revolt of the commuter, with so many agreeing with their employers far fewer days in the office to escape the high costs and poor service of their past railway experience. Surely the railway bosses should be scouring the booking patterns for holidays, special events, sporting activities and the rest to see how they can capture more of the leisure and pleasure market. That means not only keeping open the full range of lines for a busy Bank holiday but also flexing the pattern of services to attract more of the¬† travelling public. The A 303, the M5 , the M6 , the M25 and all the other overloaded holiday roads need this help from this expensive set of great straight¬† routes spanning the country and giving traffic free access to all our main cities and tourist destinations.

The largely nationalised railway is another example of huge sums of public money and public sector power being deployed by so called independent bodies. Ministers need to intervene more when so much public money and the public interest is at stake. If the railway management will not serve the railway demand when it is there  they need to be told to do so or changed for those who will. We need business people guiding  the railway and helping the Ministers who want to grow the business and make sensible offers to people who do not want to sit in endless traffic jams if there is something better on offer. A big sporting or cultural event should be a business opportunity, not a reason to ration or even close the relevant station for fear of too many people.

Le Pen and Macron battle for different futures of the EU

I do not interfere in elections in foreign countries. I do not express preferences between candidates. I am interested in the debates they hold and in the possible outcomes.
On current polling  Macron will  narrowly defeat Le Pen on Sunday week. The contest is much closer than many thought a few weeks ago and looks certain to be much closer than in 2017  when they last fought each other for the Presidency. Macron entered the contest late using the advantages of incumbency to dominate the political news by acting as President and concentrating on Ukraine, the main news of the moment. Le Pen campaigned around the country on cost of living issues and narrowed the gap with Macron. Now Macron the candidate is shifting position on a number of domestic issues and campaigning intensely. The one big debate between them could be important and swing votes.

Macron wants a more integrated EU with a strong foreign policy and a beefed up military force to back its approach to world affairs. He sees an opportunity to increase French leadership at a time of German weakness following a shift to a new and difficult three party coalition and problems from depending too much on Russian gas. He will claim Le Pen’s proposals to ease financial pressures on people are unaffordable.

Le Pen wishes to stay in the EU and Euro but wants at best a semi detached relationship with the supranational body. She sees Hungary and Poland as potential allies for a renegotiation to take back more powers for national determination. She also wishes to cut French financial contributions. She would not welcome the more integrated and more powerful EU Macron seeks.

Le Pen offers a major cut in VAT on fuel and other measures to ease the squeeze.

Whichever  wins  they will prove France is fairly evenly split between two wildly different views of the EU. It will be interesting to see how much ground Macron changes on domestic economic  issues at a time of  severe income squeeze.