Instead of being a critic of the Prime Minister, Dr Budd should tell us why the OBR forecast faster and rising growth from 2010 onwards in each of its forecasts. Why did they have to constantly scale them back? They knew the plans for spending and taxing and did not think they got in the way of good growth. Tomorrow on www.johnredwood.com I will  be offering one of the main reasons the OBR has been so off target. It’s nothing to do with deficit reduction. The OBR in Mr Chote’s letter accept that they took into account Labour’s tax rises and capital project cuts, and the further measures the Coalition took in June 2010, and still came up with forecasts of rapid growth for most of the Parliament. They have subsequently revised these down for reasons unconnected  with the policy.

    Mr Floru sent me a copy of his book for review. His study of  the USA, UK, Chile, Hong Kong, Germany, New Zealand and Singapore demonstrates how free enterprise policies generate more wealth and prosperity for all.

      He favours reducing the proportion of the state in the whole as the economy grows. He believes in slimming oversized states by prrivatisation and deregulation. He feels the private sector needs to be given enough freedom and space to grow, innovate, create jobs.

        His case studies over time and ranging widely geographically show  how a dynamic free enterprise sector to an economy can transform living standards and lifestyles for the better. He agrees that we should always take care of the poor, and make sure competition and  the rule of law allows the wealth and income  to spread widely for the benefit of all.

        Lower tax rates, stable and democratic government, and a climate which favours risk taking and peaceful commerce are important elements for success. So too are free trade and the need to stand up to vested interests. Whilst China has done well growing from great poverty through state sponsored capitalism, Mr Floru thinks they will need to pursue liberty more extensively to catch US living standards sometime.

        It is an interesting book with some good case studies. I wonder if the Chancellor will  pick up any good points from the success of other countries willing to unleash free enterprise to generate prosperity? The USSR, Cuba and other communist states illustrated just how bad state planning proved for both living standards and individual liberty. The great experiment between 1945 and 1990 in Europe showed the planned system in the East was far worse than the mixed system in the West. The Asuian success stories show the power of free enterprise to lift people out of poverty.

      In the last 24 hours the Governor of the Bank of England has declared that the government does need to do more to fix and sell the assets of RBS – reinforcing a view expressed here ever since the crisis first hit.

        Dr Cable has wrritten a long and thoughtful article in the New Statesman. I agree with much of it. He too accepts that the commercial banking  system is not operating in the way we need. He also accepts that his approach of developing state banks cannot do nearly enough quickly enough. There is no substitute for fixing RBS, and that should entail a transfer of  as many of  its risks as possible to the private sector.

   The press have lasered in on Dr Cable’s  question whether   the UK state should borrow more long term to finance infrastructure. I agree we need more infrastructure investment, starting with energy, broadband and roads. However, I think given the state’s balance sheet it is vital this should be wholly or largely fiannced by the private sector. Fix the banks, and use the markets. At current interest rates it could be made to work. Offering longer term infrastructure bonds to private investors could also help them, by delivering a reasonable quality covenant with a higher income than is currently available on government or high grade corporate b onds.

        Indeed, I would save the money being spent on the state banks which will remain too tiny to have much impact, fix RBS, selling as much as possible to the private sector, and let the government  lead a move to launch substantial bond  issues for infrastructure to private sector buyers.  That way we cut public spending a little, cut public sector liabilities massively, and have more capital spending.

      Recently the government has responded to its consultation on “Renewable heat incentive: providing certainty, improving performance”

      Let me give you a flavour of the prose:

“DECC intends to introduce a degression based approach similar to the regime adopted for the Feed-In tariffs scheme. This will involve tariffs available to new applicants being gradually reduced if uptake of the technologies supported under the RHI is greater than forecast. This will be done by monitoring uptake on a quarterly basis against a series of triggers”

In more normal language, the subsidised prices offered for alternative energy will be cut as the popularity of the chosen technology rises.

They are also  allow biomass energy to qualify for subsidy:

“In order to be eligible for the RHI, biomass installations will be required to demonstrate, either through reporting or sourcing from an approved supplier, that their biomass meets a greenhouse gas lifecycle emissions limit target and (from no later than April 2015) land criteria.”

The complexity and cost of all this means the UK ends up with energy which is too dear. It also means we run the danger of not having enough energy available for future needs. Much of this is driven by EU regulations and directives.

I have posted my contribution to the debate on the new Renewable regulations yesterday in a Commons Committee, now available under Debates on this site.

Sometimes a picture replaces a thousand words. This German 2 million mark stamp  from 1923 in Germany reminds us that even in an advanced western country less than a hundred years ago people lived through a dreadful hyperinflation.  By the peak of the price rises in November 1923 the authorities decided to remove 12 zeros from their currency, creating a new or Rentenmark.  In August 1924 the new Reichsmark replaced 1 trillion of the old marks.

                  The fear of inflation has haunted Germany ever since. It lies behind German current reluctance to print too many Euros to deal with the probpems of state and bank debts in parts of the Eurozone.  Germany knows from bitter experience that if you print too many to get round the problem of managing your debts and deficit you can trigger a collapse of confidence in your currency, a rapid move in to goods, and eventually a hyperinflation.

               Creating a new currency that might be more stable and which people trust is the easy bit of recovering from such a situation. The hard bit is the deep recession or deflation that can follow the bursting of the bubble and the creation of the new stronger currency.

              The Euro area does not today stand on the edge of too rapid an inflation – far from it. The main safeguard against printing too many  Euros  to try to stave off the day when state and bank debts have to be paid is the attitude of Germany herself. That image of the overprinted postage stamp is a timely reminder to Germany and the architects of the Euro that there is no easy way out of excessive state and bank debts or large deficits. If you try too hard to inflate your way out of your debts, you can end up with a worse crisis.

The Uk is a generous country. The government remains wedded to its pledge to spend 0.7% of our GNI on aid. Recently Mr Cameron has suggested that more of our aid spending should be used to stabilise countries in strife and assist law enforcement in troubled countries, so that more UK armed forces spending can count as overseas aid spending.

There are international rules on what does and does not count as aid spending. You can spend on teaching peacekeepers or police and that counts as aid, but spending directly on peacekeeping or policing yourself once invited to do so by the host country may not count as aid. Where our forces are helping a civilian population by assisting medically, or in other ways that usually qualifies for aid, it would make sense for that to be included in the totals.

More importantly, the government should look at the large transfers and payments made from this country to developing countries. Surely much of that money flowing to developing countries is doing exactly what aid budgets are doing – boosting incomes, offering financial assistance, providing cash for investment. Whilst UK charitable donations do not count as aid for these purposes, the tax relief granted to charities sending donations can count towards the total as this is state aid. Where the UK pays state benefits to people who then remit some of this money to families in developing countries, this is not counted as aid though it looks very like it.

France and Germany have typically included more of the loans advanced from their countries to developing countries as part of their totals of recognised aid. We need to recognise more of what we are already doing, at a time when public budgets are too stretched. To qualify as aid the state needs to be involved and there has to be a concessionary element to the loan.

Meanwhile the government is right to cut back overseas aid out of taxpayers pockets by removing aid to countries like China and India, as they are now doing. They are right to cut the budget back from the original plans owing to the lack of growth in the economy. It needs less spending to hit the 0.7% target if growth is reduced. How much aid would you spend?

At the Conservative conference last year I called for fair rules to limit benefit, healthcare and legal aid services to people recently arrived in the UK and those coming as visitors, in line with some other EU countries and the USA. (This website October 12th posting; Mailonline 8th October) Today the government has confirmed that it is working on proposals to introduce sensible rules to do just that.
This work was underway before last Thursday, so please spare me the contrbutions saying this has only happened thanks to the voters of Eastleigh!

The falling pound will mean more inflation. Savers are finding it very difficult to protect the value of their savings, let alone to get any real return on it. The government no longer issues index linked National Savings to give people a low risk way of protecting the value of their money. Index linked gilts offer a negative real return at current prices.

The UK spends one third of its national income on imports. It also exports a lot. As we have witnessed a 6% plus fall in the value of the pound in recent weeks, that would imply over a period of time a further increase of 2% in the price level, applying the 6% dearer prices to one third of our purchases.

It might turn out to be less than that. The aim of the lower pound policy is clearly to encourage import substitution. We might be able to buy more from home sources at lower prices, and save ouselves some of the dearer imports. The exporters to the Uk might decide to delay putting up their prices in line with the weaker currency. They might be able to become more efficient to spare us part of the price increase altogether.

The problem remains that ultra low official interest rates are bad news for savers. This bad news is compunded if the value of money falls more. The government needs to do more to help savers. There are many more small savers than there are people with mortgages. Mending the banks would ensure more of the newly created money got through to the private sector to finance recovery. It would also enable the UK to set more realistic interest rates to provide a better return to savers, and provide some defence for the value of the currency.

President Obama has done the right thing in signing approval for $85 billion of cuts in US public spending. He is still playing a blame game with the Republicans over who is responsible, but it is his signature on the order. Maybe the only way a democracy can order any cuts in public spending is by blaming someone else for them. It takes a real borrowing crisis in the markets otherwise to create the conditions for real cuts, as in Sweden and Canada in the past. Apparently Mr Obama would rather increase taxes a bit as well as cutting spending. Both reduce demand in their first round effects, so I can’t see how his preferred option is better.

Whilst cutting spending, the President claims that the cuts will be damaging to growth and jobs. He forecasts half a percent off the US economy as a result. It will be interesting to see what happens. I suspect the US economy will keep on growing this year, despite the cuts or because of the cuts. The cuts have clearly got the support of the markets. The many individuals and companies who have expressed their view this week by buying or selling securities approve of the cuts. The US Stock market has gone up, and US bonds have been fine.

The US economy is growing again because they have mended their banks. The commercial banks can lend on the money being created by the Fed. It is growing thanks to shale gas and cheap energy. It is growing thanks to its strong enterprise sector and its good technology. The lost public sector output should be replaced by private sector output in these conditions. More importantly, the fact that the US is seen to be tackling its deficit and future debts is good for confidence, the magic ingredient in any recovery.

I have talked today to the webmaster. He says it should be easy to place a comment, and argues that all you have to do is to log on with your name and email. The system does not permit you to log in with a simpler method as a regular, as he says that could impose more barriers through the need to verify.
It is quite true more than one person can use the same identifier as a blogger – e.g. Chris. I do have to ask for people to use unique identifiers, so could the various Chris bloggers use Chris 1 and Chris 2 etc perhaps?
He is following up on one complaint I have had by email. If you could kindly explain particular problems here in response to this post, he will look at the issues for us.