I read in today’s Mail online something about what I am going to recommend on taxation when doing the policy work on the Manifesto. It was a very misleading piece that does not reflect my views.

 

The Sunday Times was not a lot better with its front page story on migration, though the media of course immediately assumed every word of it was correct!  The best source for my views and actions is here, for any journalist interested.

 

           The EU partners are pressing on rapidly with full union. The logic of the Euro requires ever more control to be taken to the centre over economic, fiscal and banking policy. The logic of ever closer union and the wish to harmonise their countries leads to outbreaks of integrationist policy. The EU view of mutual solidarity and support leads ineluctably to more sharing and pooling of power.

             This process has been going on for more than a decade since the Euro was established. Under Labour it was disguised. The then government usually signed up to it all, avoiding rows which would have highlighted its import. When challenged, as they regularly were by the Conservative opposition, they played down the importance. They always said they had established red lines which meant we controlled our own tax, benefit and borders policy, though it turns out we do not.

              The Lib Dems like to behave similarly, or sometimes wish to be more honest and to welcome ever closer union and more power for the EU. Mr Cameron does not, and seeks to use the Conservative position in  the coalition to limit the damage to the UK constitution. In recent days he has sought to keep the UK out of the impact of the banking union. He has argued against a defence union. He has sought to gain greater control over our benefit system. When will the other main parties in the UK wake up to the need to define a new relationship with the EU as the Euro area rushes on to full political union?

              The UK debate on the EU has been made more difficult  by the unwillingness of Labour to debate it openly and honestly. When the main opposition party is in denial about how much power they transferred, and how much power the EU would like to add to that transfer today, the public debate is enfeebled.  Today when the EU’s big role in benefits, borders and energy is at the centre of the UK political debate, we do not know what if anything Labour would want to do about all the power the EU wields over these crucial matters.

             UKIP supporters will continue to protest that all can be solved by their party, by simple withdrawal. However, the polls continue to point to most people voting in General Elections  for parties that welcome further EU integration, or for the Conservatives, the only Eurosceptic party with MPs capable of doing anything to resist the tide of EU power. We need to force the federalist parties to explain how much power they have given away, and to come clean about how little scope there now is for an elected UK government to alter great swathes of policy.

Because it is nearly Christmas, today we have a fairy story.

Once upon a time, not so long ago,  Jacques was a French farmer who lived with his mother. Their farm was not providing them with a decent living, and poor Jacques struggled every day to provide for the family.

Jacques was not stupid. He has heard the old English fairy story of Jack and the beanstalk. He was  not going to sell his last cow for magic beans, as he is not sure he believes in those. Nor does he like the sound of the giant very much, even though the giant’s hatred was specifically reserved for Englishmen, which Jacques can understand. There is no guarantee, thought Jacques, that he would like Frenchmen much more, or that the giant’s wife would be successful in hiding him.

One day Jacques could not get his sums to add up at all. He went to his mother and said he had been offered the chance to share their money and currency with the Germans over the border. He thought this could be a good idea. He pointed out that the Germans had plenty of gold. They seemed much richer than Jacques and the other French locals. If we joined the Germans, Jacques, said, we surely would be able to share some of their wealth and success. It was even rumoured that just like the old giant in the story, the Germans had a goose that laid golden eggs. Maybe they would share it with him.

His mother was sceptical. She didn’t like the Germans very much, because she heard bad things about them in the past. Jacques soon put her right. Modern Germans, he said, are very different. They are nice people now. They do want to help. They have said we can share our currency. They are not like old Blunderbore the giant.

His mother was won over. She consoled herself by thinking, at least my son doesn’t want to give our last cow away for a silly magic bean like Jack in that old tale. Maybe there is something in what he says. She didn’t have a better answer to how they could make a living, and the thought of all that German gold was very enticing. She didn’t really believe they had a golden goose, but she had read of big German gold hoards. There was no telling how they had got those.

So Jacques and all the other locals agreed to share their currency with the Germans. The Germans wanted to do it, as they could then sell many more of all those wonderful things they made so  well to all the other people in their currency zone. it meant they could sell more and save all the profits.

       The others  lived well for a few years, mainly by borrowing money to spend whenever they wanted to. Being associated with the Germans meant they could suddenly get cheap credit. They all wanted to buy lovely new German motor cars, which they did by borrowing.  Then one day when Jaques went to the bank to borrow some more so his family could have a holiday, the bank manager said No. He said the Germans were not sending him the money he needed to make all the loans, which had proved ever so popular.

Jaques went home and told his mum and friends. They said he would have to go to see the big German bank manager, and ask him nicely to keep sending the money to their local banks. After all, they did all share the same currency and had all agreed to look after each other.

So Jaques set off the see the German bank manager. He didn’t really believe the manager would be anything like the giant in the story, but as he got near to the office he thought he heard someone with a loud voice chanting

Fee fi fo fum
I smell the blood of a Frenchman
be he alive or be he dead
I’ll not part with my gold to buy his bread

That was probably all in Jaques imaginings, but when he got into the office a very polite normal sized bank manager confirmed that Germany was no longer willing to send lots of money to help everyone else in the currency zone. He said charity began at home. He said the Germans had worked very hard and had earned their gold. They did not have a magic goose that laid gold eggs, contrary to rumour. He was being kind by telling them there was no more money, so they could turn too and work harder. That had made the Germans more prosperous and so it should them.

So there was no golden goose after all. Or if there was, the Germans were being nasty and would not share it. If the Germans were right that they had got all that gold by hard work, how were Jacques and his French friends to catch up? The Germans said they had made all their gold by selling things to all the other people in their currency zone. The French couldn’t do the same because the Germans had already satisfied the market. Now the other people in the currency zone, like Jacques himself, had run out of money and could not buy lots more goods. Only the Germans could afford to buy more goods, but they refused to.

So what were Jaques and all the others to do? They had relied on all that German gold. Some of them really thought the Germans did have a golden goose. Some were morally indignant that the Germans did not want to send them any more. They thought the least the Germans could do, having taken so much money from them in the past for the goods they sold, would be to send some of that money back.

This fairy tale could have a happy ending. Some say the Germans relented and sent Jaques and the rest some of the German gold and they all lived happily ever after. Some say the whole area found a golden goose after all. It was a modern kind of goose called quantitative easing, so they could simply print enough money for everyone. Some say the Germans dug in saying if necessary there would be the break up of the currency. The others all had to go back to their farms, cut their costs and try to make a living after years of neglecting the hard work they needed.

I can’t tell you the ending, because, you see, this fairy tale is not yet over. Perhaps you can help me by telling me your idea of how we can end it happily.

 

             Yesterday I explained why you need increased consumption to sustain growth and to  generate the need for investment. I pointed out that exports are not morally potent or special as a type of output. They just add to output and jobs as does supplying the domestic market. You need to export enough only in order to pay for the things you  import that you think are better made abroad. If you are unable to export enough to cover your bills in the longer term, then you need to make more of what you want at home.  Rebalancing in favour of more exports and more investment may be a good idea, but it can only happen if there is enough consumption demand at home and abroad. Nor can it happen if people are unable to borrow sensible sums of money to buy homes, cars, and other large ticket items.

            Today I want to look at why the state, just like individuals and companies, has to accept there are limits to how much it can borrow. My critics here have tried to argue I want there to be another consumer boom and property bubble based on excess borrowing by the private sector. No I do not. I do, however, want there to be sensible amounts of credit so people wanting to buy homes can borrow on mortgage, and companies wishing to expand can add prudently  to their loan capital. My critics should also understand that household wealth is now standing at over £7 trillion. The value of our homes net of our mortgages is £3 trillion, and the value of our pensions, insurance savings and the rest is £4 trillion. It may be perfectly prudent to borrow a bit against this big asset base.

           The issue is how easily in future will the state – or an individual or company – be able to pay the interest on the debt and meet the repayment schedules?  At extremes I would hope those who favour never ending debt fuelled state expansion will see the same rules apply to a government as to a company or person. If the state borrows too much, interest charges take up too large a proportion of the tax revenue of the country, and the state is no longer able to provide the services it wishes to offer.

                Once lenders to the state start to doubt its ability to pay the interest, so they force the  state to pay higher rates to borrow more. The state can lose its ability to borrow seemingly limitless sums to meet its desires and needs. This has been very obvious in the case of the crippled sovereigns of Euroland, where Greece, Ireland, Portugal and Cyprus have all found it impossible to borrow on the markets to sustain their spending and meet their obligations. They have been forced into special loans by the international community requiring deep cuts in spending. The same has happened in living memory with some latin American countries, led by Argentina, where they reach the point that they cannot sustain their debts and have far worse austerity forced on them than would have kept them out of trouble in the first place. Indeed, the 1970s Labour government got to the point where it had to pay more than 15% to borrow money from the bond market, around the time it was forced into spending cuts by the IMF. A state cannot carry on borrowing when the interest bill spirals out of control.

             It is true the combined powers to tax and to print which sovereign governments enjoy and individuals do not, give a state more leeway before the crisis hits. It does not, however, prevent a crisis in the case of states which borrow excessively for long periods. The UK has been borrowing far too much. The total build up of state debts and liabilities, often catalogued here, had gone too far by 2010 and did need correcting. Correction is taking  time, but the deficit is now falling  and in due course state debt as a proportion of output will start to fall. That is a necessary adjustment that has to be the fundamental concern in rebalancing the economy. If we do not do that we do just fuel an unsustainable debt burden for future taxpayers.  Borrowing is not free money. It is deferred tax.

 

 

           Growth in the UK economy is producing its fair share of discontents., They are often the same people who claimed there would be no growth under policies designed to cut the deficit. There is no pleasing some people.

            The new moan is that the growth is too dependent on consumers, without enough investment and exports. Let’s examine this a little. It’s a kind  of moral mantra – we must have the right kind of growth.

            The point in exporting is to sell goods and services we are good at for good prices, so we can buy goods and services that foreigners can produce better and cheaper with the money. An export is not especially moral or worthy. It is someone else’s consumption, rather than consumption for ourselves. The  only point of it is to earn us foreign currency which we can then spend on consumption of goods and services from foreigners.

            If we are unable to sell enough to pay for goods from foreigners, then we have to sell them our assets or borrow from them. We have been quite willing and able to do that for many years, so we have run a balance of trade deficit. The rules of the EU are especially difficult for us, reinforcing a permanently large deficit with the rest of the EU. They made it easier to trade in the things France and Germany were good at, and less easy to trade in the things we are good at.

             Saving and  Investment means buying things that can help us consume more in the future. An individual saves so he can buy a dearer item later, or so he can have more income in old age than he would otherwise enjoy. A company invests those savings in an extra factory or a new product, which means we can consume more once they have made that investment. Investment is only worth doing if you are using all your current investment capacity, or if new investment can produce to a higher quality and lower cost. The whole point of saving and investment is to consume more later. An investment will not be made in additional capacity unless people do plan to consume more and are therefore likely to buy the additional output.

           The big collapse of 2008-9 led to a shortage of demand . This led to people losing their jobs, to factories not having full order books, and investors being put off committing more capital to risky projects. It does take more consumption to put this right, which is now beginning to happen. Now is not the time to go all puritanical about the wrong kind of growth. As demand works through, then we should expect investment to pick up. Higher house prices and more mortgage finance is leading to a pick up in housebuilding. People buying more cars is leading to more investment in car capacity. The purpose of providing more homes and cars is so people can consume them, use them, enjoy them. That is not against the laws of economics. Those who dislike it have a very austere outlook.

 

So it’s official. Those of us who have been warning we do not have enough power for the future thanks to the EU’s mass closure programme of our power stations have now been vindicated  by Ofgem’s deeds. They say there could be a shortage next winter, so they will pay large industrial users of power not to use so much in the late afternoon and early evening when demand is often highest. They also say they will try to keep older oil plants available on stand-by.

      Why don’t they admit this is all the result of an EU policy that is backfiring badly? Why don’t they help make the case to the EU that we should not close old stations until we have  new ones to replace them with? We want a sustainable industrial recovery in the UK. It does not send the right message if industry is to be asked to use less power as there is a shortage.

 

          For many readers of this blog the new relationship wanted with the EU is very simple – the same relationship as all other independent countries around the world have with the EU today. Many now just want us to leave.

           The Liberal Democrat and Labour parties, currently accounting for around half the votes in polls want no renegotiation. They think the current relationship is just fine. Most Labour and Lib Dem MPs failed to vote for the Referendum Bill put through the Commons by the Conservativve MP  Mr Wharton. Their leaderships refuse to offer either a new relationship or a referendum on our current arrangements.

           The Conservatives have set out a clear policy of negotiate and decide. Many fear they would not be able to get much improvement in our current terms. If that is the case then the country can simply vote to leave.  If by any chance a good deal was on offer, then the c0untry could vote to accept it. The most important thing is that whatever is done is endorsed by the British people in a special vote.

          The issue arises, what kind of renegotation would a Conservative government undertake? The leadership has recently made clear it would entail taking back control of our borders and benefit system. It would also entail removing  the impulse to ever closer union from the different Treaty the UK was prepared to sign. That is progress. Added to it, many  as a minimum would want the proposal of the European Scrutiny Committee that we should have a Parliamentary procedure to amend or disapply any European rule or law that does not meet with the approval of the UK Parliament. That way UK Parliamentary sovereignty can be re-established, and one Parliament could no longer bind a successor by consenting to an EU measure.

          In recent weeks 3 senior Judges have made clear their concerns about the way the European Court of Human Rights  are seeking to overrule Parliamentary supremacy in a number of important areas. This could be significant too, as we seek to find a way at last to give the British people a new relationship and a proper say in how they are governed. It is interesting that some  Judges think the ECHR is gping too far in asserting jurisdiction, and removing the old certainty where Parliament passed a law and our judges interpret it. This could lead on to similar worries about ECJ matters, especially as the European Court is seeking to make human rights matters for them as well.

 

 

The recent US judgement that the extent of surveillance undertaken  by the US state is incompatible with American freedoms under the constitution is a welcome and important development.

As someone who was hopeful of something better from the Obama Presidency , he has been a big disappointment when it comes to civil liberties. He promised to close Guantanamo Bay, then failed to do so. He now supervises a very complex web of surveillance over the US people in the name of countering terrorism.

Guantanamo Bay was the very opposite of the system we fight to uphold – the right of every one to a fair trial, and the presumption of innocence until proven guilty. The surveillance of phone systems is said only to be about who you rang and when you rang them. It does seem very heavy handed to have to keep so many records about millions of innocent people.

Of course a relatively free society like the USA or the UK has to be realistic. There are enemies of a free society who do not play by our rules. We need to use our border controls, our police and courts to tackle them as need arises. We also need to be careful lest in the state’s enthusiasm to ward off evil, it goes too far in the direction of creating a Big Brother society where the state pre-empts our freedoms in the name of security.

 

            I do not normally dwell on the past. Last week I was phoned about a couple of memos the press had seen as more documents were released under the 25 year rule. As they are of some long term and even topical  interest I will set out some background.

            In the middle 1980s I was both Head of the Policy Unit and Economic Adviser to the Prime Minister. One of the memos they have found is my note on the state of interest rate and currency management in 1984, when I first detected that the Treasury and Bank were moving away from domestic money supply targeting to trying to manage the value of the pound . I strongly supported the stated  policy of money targets.  The Treasury went on  to shadow the DM, a policy I thought would prove damaging. When the government did eventually join the ERM, far from preparing the UK for possible Euro entry, it caused a UK boom and bust which was entirely predictable.

          The memo was just one of many communications sent to the PM to keep her up to date with these big issues, as we fought to grow the economy after the high deficits and inflationary tendencies of the late 1970s. During my time at Number 10 the PM did resist any official policy of shadowing the DM or joining the ERM. She did not want to believe at first that Treasury was managing the pound without that being the express policy, and then became worried when the evidence pointed in that direction.  I with others continued to brief her against the ERM right up the time when her colleagues effectively forced her to allow entry. In the later period Nicholas Ridley was the principal opponent of the ERM from within the Cabinet, who constantly made the case.

            The second memo was a piece about how we were  handling the Stock Exchange. The possibility of an OFT enquiry into the practises of the Exchange furthered the development of thinking in the markets which in due course resulted in Big Bang. I expected Stock Exchange reform to lead to a big expansion of the London markets, with many new entrants and much more capital and talent at work. I also expected it to mean the financial services and banking industries would break out of the narrow confines of the Square Mile, and help with the task of developing and improving the derelict  lands to the East around the old docks. So it proved.

           It is curious that out of all the memos and briefings I wrote with my Policy Unit team these two should be the ones that excite interest or have survived to see the light of day so far. The Policy Unit used to brief the PM on most domestic policy issues which crossed her desk. These briefs were welcomed by the PM who found they combined clear summaries of the different positions being taken around Whitehall with suggested ways of reaching a conclusion or an alternative strategy which might be superior. Most of the memos came back with underlining and notes to show they had been useful. Occasionally, as with the one I wrote  that proposed a major privatisation programme for the new Parliament in 1983 it did not get returned because she wanted to keep hold of it. After leaving office she donated it with other papers to the archives at Churchill College Cambridge.

 

          The government has decided not to require everyone to move to digital radios, and  not to set a deadline for a transition to digital.