When Louis XIV magisterially claimed that he was the state, he was pointing out a truth that as a highly powerful King in a centralised autocracy he decided what the state did. To him, and to the many who had to obey him, he and the state were the same thing. Subject peoples in France had to work round his dictats and live with this identity.

        In a democracy some think we are all the state, we should all be able to feel and say that the state is us collectively. To try to get voters to  buy in to this common feeling, many politicians and political parties work at trying to show the state is there for us in need. They seek to involve the state in many facets of our lives. They seek to bribe us with our money, taking money off us in taxes, only to give some of  it back in ways of their choosing.

           This model works for some of the people all of the time, and for many of the people for some of the time. It is a more stable and freer system than socialist tyrannies or military dictatorships. It does leave significant numbers feeling the state is their enemy, taking too much from their efforts, and doing the wrong things to them. In a democracy we are at least allowed to express our anger at what the state does, to press for it to reform its ways, and to change the people who direct it from time to time. That is certainly better than having to put up with a Sun King until he dies.

          The big problem with western democracy is the tendency for politicians driving the state to spend and tax too much, damaging the freedom and independence of the people who have to support the state. I wish over the next few days to explore this paradox of freedom. Many people contributing to this blog will say “L’etat ce n’est pas moi”. They do not want the state to spend so much of their money, and disagree with many of its decisions. As we will see, they will however end up paying the bills if they stay in the country.

 

             The Chancellor’s wish to revive housebuilding and promote more home ownership is an understandable  one. His critics now allege that he is seeking to invent  US sub prime style lending, allowing people who can scarcely afford it to borrow more than they should to meet current levels of home prices.

              This need not be the case. Indeed, I hope that is wrong, and that the new scheme will protect against any such danger. Any government intevrention in the mortgage market, on top of owning one of the UK’s biggest banks, should ensure proper checks on the credit w0rthiness of anyone they help, with a view to minimising taxpayer losses. Interfering in the market too much or offering guarantees against a loan prospect that a commercial organisation wouldn’t make is not a good idea.  What we do know is the construction industry is operating well below past levels of output. Very few new homes are being built. Meanwhile even after the reductions in net migration achieved so far, the population is growing through substantial inward movement of people.

            There are all too many people born here or legally settled here who have not been able to buy their own home. Young people have to wait many more years on average before being able to take on their first home with a mortgage, than the generation that went before them. The two main constraints today on them buying are the high level of deposit required, and in some areas the high level of house prices in relation to incomes.

              The issue of home prices creates a problem for the government. Following a policy designed to get them to fall further, as we experienced during the intense phases of the Credit Crunch, would put people off buying and make the position worse in the short term. It could also add to taxpayer losses incurred at RBS and HBOS, where we own big stakes in the  existing mortgage books.

              The price of homes is heavily influenced by the price of second hand homes, which in turn is influenced by mortgage availability and multiples of earnings lent. The government’s solution is to seek to cap home price rises by supplying more new homes, without doing more to withdraw credit and undermine prices further. Indeed they now think they need to boost credit a bit with some taxpayer guarantees to help banks lend a bit more.  Prices did, after all, experience a substantial fall towards the end of the past decade outside central London.

             To make a success of the new policy of guarantees of the extra borrowing needed to reduce the deposit, the government will have to ensure sensible  credit analysis. It would not help to end up with a load of sub prime mortgage guarantees on the state books. 

          The reason the government has been driven to this policy is the banks have not been mended sufficiently to sustain normal commercial lending at a sufficient volume . The regulators have lurched from being far too loose to being too tough, leaving the mortgage market starved of funds.   The government needs to move on from these special schemes, to sorting out the rest of the state banking problem, in ways we have often discussed here. What we need is a set of competitive working banks with enough cash and capital to allow sensible levels of lending. Then we will not need special measures like this. I still favour dealing with the problems of RBS as described, rather than new special measures to get round the problems of the banks.

          I hear there is also a political spat about second homes. I trust the government will design the detail of the scheme in a way which does not use state support to help buyers of second homes.

 

Budget 2013

 

                 In June 2010 the Office of Budget Responsibility forecast 2.9% growth in 2012-13, 2.8% in 2013-14 and 2.7% in 2014-15. In the 2013 budget they forecast 0.2%, 0.8% and 2% for those years. The total growth of 8.6% has fallen to just 3%.

 

                The original strategy rested on increases in total public spending in cash and real terms for the first two years, followed by a small real decline in the  second half of the Parliament. They have kept more or less to budget, with a modest  underspend recorded for 2012-13. The structural deficit was to be eliminated by 2015 by a large increase in tax revenue.

                 This budget confirms that tax revenue has fallen well short. In areas like higher end Income Tax and CGT the higher rates of tax have done damage. The government estimates that the 50p tax rate has lost the Exchequer £7bn a year as a result of very high earners leaving the country.  Tax revenues generally are below forecast owing to slower economic growth.

                By 2014-15 tax receipts are estimated to be £62 billion lower in 2014-15 than the June 2010 forecast. Borrowing will be considerably higher as  a result.

                The budget seeks to speed growth to achieve the delayed increases in growth rate the government is seeking.  They propose to do this by a combination of targeted tax cuts, monetary expansion, improved flows of finance for the mortgage market and a general income tax cut to boost family incomes. Petrol and beer duty area protected from further rises, and 1p is taken off beer duty per pint.  The tax cuts are financed by additional public spending reductions, to avoid making the deficits worse.

                The budget in itself is modestly positive for the economy. The numbers involved in the tax reductions are small, reflecting the Chancellor’s limited scope to offer changes given the poor overall fiscal arithmetic.

                  Two items that did not get fully dealt with in the Budget matter more. One is the future ability of the banks to finance recovery, and  the other is the question of energy prices and supply.  The Chancellor says he will improve and extend the Funding for Lending Scheme, as well as introducing his plans to help people buy new homes on mortgage. There are welcome signs the housing and mortgage markets are beginning to improve, and this could help further.

                   The second is the high cost of energy to industry, offices and homes. The Chancellor has promised to remove the carbon levy from the big energy using businesses, for fear of losing them from the UK if he perseveres with it. He sounds as if he wants to do more, but EU rules and Parliamentary opinion in the Lib Dems and Labour constrain his room for action. The UK needs immediately to extend the useful lives of its coal burning  power stations, but the Chancellor was silent on this matter in the Budget.

      This post is tomorrow’s post, put up early. I will post my Budget debate speech in the Commons tomorrow when the Hansard is available. It includes the figures showing real public spending has risen so far under this government.

 

 

The story of Cyprus is a cautionary tale for those who like the Euro and think the EU is getting it right.  The EU is now demanding that Cyprus finds Euro 5.8bn or 33% of her National Output as her contribution to the rescue funding the state and its banks now needs.  That would be like the EU telling the UK to find a one off tax revenue of £500 billion, almost the total tax revenue each year which we collect.

Cyprus is asked to cut her budget deficit by 4.5% of GDP in four years, sell more than 8% of her GDP by privatisations, undertake a large gold swap and raise her Corporation tax rate from 10% to 12.5%.

It just shows what can happen when a country surrenders its monetary and budgetary sovereignty to the EU. In the good days of the Euro a large banking centre developed in Cyprus. EU rules and regulations did not prevent or control that at the time, despite it being within the ring fence of the Eurozone and therefore of common interest to fellow zone members. Now it appears the banks need a major injection of new capital, and the state has to slash its borrowing quickly, to persuade the EU/IMF bank managers to lend some more.

Cyprus is saying these measures are too extreme. The tax hit on deposits is large, though of course some of that is a hit on foreigners with deposits in Cyprus. The tax rises and the budget contraints are very large. Germany and her allies are saying that of course a country in such a financial difficulty needs to contribute to its own recovery. The row is over how much, and whether such a large demand might make matters worse.

Cyprus is to the Euro as a district area in the UK is to the sterling union in terms of size. You would normally expect the centre to bail it out whilst dictating future terms. Because the Euro area preserves the fiction of independent  countries within the zone, the rest of the Euro area feel they do need to demand a  bigger sacrifice from the offending country.

The battle of Cyprus is an important one in the war over the richer parts of the Union accepting their responsibilities for the poorer parts, and in the acceptance by the poorer parts that they do need to foll0w the discipline of the strong.  Meanwhile, threatening depsoits in Cyprus is not a good idea from the wider perspective. It will undermine confidence in weak banks and weak countries elsewhere and complicate the ECB’s job of keeeping the banks liquid.

Cyprus’s banks remain closed. This is unacceptable. Normal economic activity ceases if banks cannot make money available and settle transactions.  They need to reopen the banks quickly, with a clear statement of depositors’ positions. The ECB needs to supply ample liquidity to the Cyprus banks to prevent a major run. It is almost beyond belief that people living in an advanced EU country, part of their common currency, can get to the point where they cannot undertake normal transactions through their bank and do not know how much of their money in the bank they will one day be able to withdraw. It is even worse than the many arguments and forecasts some of us made when putting the case against the Euro.

 

 

           I believe in press freedom. There are laws of libel and laws against phone hacking to protect against press excess.  All those of us who have suffered from false stories or have had our phones hacked  know what it is like to be on the wrong end of it. In my case I would still rather than live in a society where the press can take on people and institutions in power, even if they sometimes get it wrong, than in a society where those in power regulate the press.

 

           Savers are important people in a successful economy. We should want more people to make provision for their own future. We should welcome them providing finance for others to use  intelligently to add to our national income and wealth.

            The present government says it wants people to be more self reliant in the future. It welcomes the idea of people saving more for their retirement, putting aside more for bad fortune or ill health, buying their own homes and investing in their own business. A more self reliant enterprising society based on more personal ownership should be richer and happier, with more tax revenue to help those in need who cannot fend for themselves.

           The problem is the inherited deficit and the planned way to reduce it are getting in the way of really helping actual and potential savers. The wish to raise more in tax revenue than people are prepared to pay, has already led to new raids on people’s pension funds. Whilst they have been mainly at the higher end, many more savers fear there could be further tax changes that will adversely affect them

            Pension funds too have been undermined by the ultra low interest rates on government debts, thanks to Quantitative Easing. This has left funds with large deficits, and forced many companies to close their funds completely. Many people now in the private sector have no access to an employer fund anymore as a result.

            The same ultra low interest rates hit the living standards of all those seeking to rely on or augment their income from interest on savings. People contemplating a cash ISA or a safe investment of a cash lump sum they have acquired face very poor returns.

           Savers have then been hit by a higher rate of inflation than the Bank planned or promised. When inflation gets as high as 5% it eats away the money of the prudent at far too fast a rate.

           The Chancellor would be well advised to make things a bit fairer for savers. Saving and making provision for your future is a good idea. Too many tax changes, too little return, too much inflation put people off saving or make it difficult.

 

         We will need to study the small print of this late night agreement. Meanwhile I thought it would be useful to remind readers of some of the key calls made by all three main  parties agreeing, before we celebrate too much:

Joining the EEC

Joining the Exchange Rate Mechanism

Setting up an independent Central Bank to ensure “no more boom and bust”

Various United Nations military interventions

Climate change policies

 

 Some things most parties and politicians agree on.  Most of the politicians I know want to eliminate or reduce poverty. The new Pope has decided he too will be an advocate of the poor, bringing further media attention to this perennial all consuming issue.

Most parties also agree with the obvious point that poverty is a shortage of money to spend on their own lives.  The disagreement comes over how to supply the shortfall.

On the “caring” side of the argument are those  who think the answer is simply for richer people through  the state to give them more money. On the “tough” side of the argument are those who say we need to do mroe to promote better paid jobs for the poor which they should take to earn for themselves.

The divide comes down to the old adage – is it better to give a hungry man a regular supply of fish, or to give him a rod and teach him how to use it for himself?

Maybe the answer is you need to do a bit of both. You should  not let the man starve when there is a spare fish available to give him. You should not want him to rely for the rest of his life on spare fish won from the sea by others.

Mr Osborne has a chance in his forthcoming budget to make tackling poverty a central issue. He needs to make it more worthwhile to save, to go to work and to take responsibility for your own life. He could start by pledging to do better at controlling inflation with his new Governor of the Bank. We do not need a relaxation of the already lax approach to price rises.  He could make his own contribution by cutting energy and carbon taxes to make fuel more affordable. He should  cut taxes on working , saving and venturing, so the message is clear. We will help those in need, but the best help is to assist them tAke care of themselves.

 

 Heavily indebted governments regularly pillage the money of savers. The reason is simple. Savers have spare money and governments don’t. So many governments want to live well beyond the means of their taxpayers. Some rob savers by inflation, eroding the value of their savings. Some do it by special savings taxes. Some do it by controlling interest rates, to ensure the government can borrow cheaply at the expense of the savers return. Some do all three of these things.

Now the EU and Cyprus are simply going to confiscate part  of a person’s savings away for being in a particular banks. That looks like a great way to encourage the mass migration of savings from weak banks in the Euro area to stronger banks somewhere else.

 

On Thursday I was debating the Blair years at the Cambridge Union. Hazel Blears put up a spirited defence of the Labour government. She said that when Labour arrived in power her own town was run down. By the time they left office it had new schools, a better hospital and other improvements from enhanced public sector investment.

I am glad her town benefitted from some of the massive spending and borrowing Labour undertook in office. I guess if there had been a Conservative government they too would have spent a lot of extra money on her area. Conservative governments, like Labour governments, traditionally spend much more of our money in Labour areas as they agree there is more need there than in the more prosperous Conservative parts of the country. I also agree with Hazel, unlike some of the people who write in to this blog, that the public sector can and does contribute to national output and wellbeing. The output of a public sector hospital or school is as much a part of national output as the output of a private sector school or hospital.

The missing parts of the Labour discussion, however, revolve around two sets of issues.. Why didn’t the large expenditure of money in the poorer areas lead them to catch up with the richer areas? Why did inequalities expand rather than contract? Why did London continue to outperform the areas attracting the most public spending? Secondly, don’t we need a bit more balance in public spending?  Whilst I do not begrudge Hazel her new schools and better facilities, there was no evidence of anything similar in my area. By end of  the Labour years we had grossly overcongested roads, and a shortage of school places, with a large backlog of building maintenance and replacement in the public sector.

The truth is the Blair years lived on credit too greatly, leaving us with a huge problem of paying the bills and repaying the debts which will continue to haunt us for some years to come.  The Blair model of public sector led spending gave some help to the areas that  benefitted most from it, but failed in the main to encourage a productive private sector to take  off and generate lots of new private sector jobs in the poorer areas of the country.  The public sector was not uniformly favoured either.

We are entering the long rebalancing. To make other areas as rich as London will require much more private  sector led growth in them. To regenerate the whole public sector, and not just favoured parts of it, requires reform as well as fairer funding.