There is understandable frustration that the Uk economy is not growing. It  gives everyone interested in economics and government policy the opportunity to fly their favourite kite, offering it as a solution to the big question of how do we achieve a decent rate of growth. There is a danger in such a situation. Some of the ideas mooted have little or nothing to do with promoting growth. Some will be positively harmful. Yet they all get a showing on the media because it is the fashionable topic.

               Recently we have heard the idea that we need a wealth tax. I know of no countries that have taxed themselves into greater prosperity. We already have three wealth taxes in this country – Capital Gains Tax, Stamp Duty and Inheritance Tax. Income Tax is steeply progressive, with the top 1 % of income earners paying 25% of the total tax take. The Chancellor is right to rule out the idea that an additional wealth tax would solve the problem.

                 We have also been told that building a third runway at Heathrow would do the job. As critics of this scheme have pointed out, even if the government did suddenly accept this  proposal, no construction work would take place  this side of the election, given the long delays which the planning process would impose. There is a big issue over London’s airport capacity which the government needs to solve, but this is no quick fix for growth in 2o13.

                  The Chancellor lets it be known that he is not suprised to be unpopular. He did in Opposition regularly predict just this development. He also used to predict that by now Conservative MPs would be queueing up to ask him to go easy on the cuts, pleading  with him to spend more. Instead, more Conservative MPs are pleading with him to control public spending, and offering him list after list of items they would like to see cut, usually starting with some of the items in the overseas aid and EU budgets and going on to cutting subsidies to nationalised businesses.

                   This autumn will see, we are told, a new Bill to promote economic growth. It needs to centre on curbing the appetite of the state for more spending and regulation. It needs to allow the private sector to supply the broadband links, the new roadspace, the power stations and the gas and oil flows from domestic sources that we need to power an industrial and commercial  recovery.

 

          I am not an American. Nor am I a Republican. I can come to US politics with the neutrality of the foreigner, knowing it’s not my personal business and knowing I do not have a vote. I also come to US politics knowing that what the US says and does still matters in the world. It falls to US citizens to hold the debate and make up their minds, but their actions will have an impact on us all.

          In the run up to the last Presidential election I commented here on the skill of Mr Obama’s campaigning, and the attractions of his messages of hope and change. I personally liked his promise to close Guantanamo Bay and to move away from the excesses of some Neo Con interventions in  other countries. I predicted he would win the nomination against Mrs Clinton, and predicted he would go on to win the Presidency.

         Since he took office there has been  disappointment. Many have felt their hopes dashed or dented by  his actions and inactions. It proved too difficult to close Guantanamo Bay. Interventions in the Middle East continued. The economy has not performed as well as Americans would like. Obamacare has proved deeply divisive with his fellow countrymen and women.

                   Mr Romney and his advisers understand this mood. Mr Romney’s campaign launch speech on Wednesday repeatedly talked of a sense of disappointment and let down with the President.  He summed it up by saying “You know there’s something wrong with the kind of job he’s done as President when the best feeling you had was the day you voted for him”

                    Crucial to the Romney offer is the ringing jibe which summarised his speech:

“President Obama promised to begin to slow the rise of the oceans and heal the planet. My promise is to help you and your family”

                       It will be interesting to see who now has the mood of the people. Mr Romney senses that high flown utopianism, whether green or otherwise, is no longer wanted. More people sense it does not work, or think it is not based on good science  or cannot be achieved, whilst many think it has meant a worse deal for them. He offers them lower taxes and more reward for working. He offers them more jobs and better business conditions. He offers them cheaper energy.

                          The election is too close to call. My guess is Mr Obama has to come up with something new and special to counter this homespun appeal to voters’ self interest. Their self interest has, after all, taken a battering from recession and credit crunch. Maybe they don’t mind the fact that Mr Romney has made a lot of money in the past. They might like him to help them make some too.

 

               Mr Draghi has recently tried to find a third way. He thinks making Euro member states choose between belonging to a country called Euroland or leaving the currency altogether is too stark a choice. He thinks there is a middle ground where they can have a single currency without a  single government and single budget.

             So how does he think this can be brought about? He is realistic enough to say the present framework ” left the Euro area insufficiently equipped to ensure sound economic policies and effectively manage crises”. He says there does need to be more common government, but it can fall short of a proper unified state with major transfers of cash from rich to poor.

              He seeks, when speaking to the Germans ” true oversight over national budgets. The consequences of misguided fiscal policies in a monetary union are too severe to remain self policed. …we need guarantees of competitiveness… The euro area is not a nation state where persistent cross regional subsidies have sufficient popular support…there need to be powers at the centre to limit excessive risk taking by banks…. there also needs to be a framework for bank resolution…”

            When speaking in Spain this becomes creating four building blocks for  a “Genuine Economic and Monetary Union”. ” 1) An integrated financial framework, a so called banking union   2) a form of fiscal union that recognises our deep economic interdependence  and the need for collective action 3) an economic union that supports the competitiveness of the Euro area as a whole….4) a political union

               He is describing the same agenda in different terms to audiences who want very different things. There is, however, at the heart of Mr Draghi’s two versions an inherent contradiciton on the issue of subsidies and transfer payemtns around the union. The language in Spain implies they are on the agenda, and the language in Germany says they are not.  “Economic interdependence  and the need for collective action implies solidarity payments from rich to poor”, when he is telling the German audience they will not have to make such payments. Which is it to be? The answer will then  tell us how tough the budget discipline on each member state has to be. There remains the small issue of how the EU manages to impose the discipline.

              The truth is there is no middle way. If the Euro is to work it will take substantial transfers from rich to poor, as well as a common fiscal and banking policy. That means a state called Euroland replaces the member states in very important areas of policy. It also means German surpluses have to be partly  taxed away for the benefit of the poorer areas, with the rest  transferred by the banking system to where they are needed.

   

                On Monday evening I turned on the tv to see the beginning of a report on the work of a platoon of our troops in Afghanistan. I was not planning to watch it all, but I became gripped by it.

                It was a simple  long statement of what it must be like to serve for several months on the front line against the Taliban. The Lieutenant in charge came over as thoughtful, very concerned for his troops,  and well aware of the big responsibility that rested on his shoulders. The soldiers came over as brave and long suffering, prepared to carry out orders to the best of their ability and well aware of the dangers they were placed in. They were, as MPs never fail to say, a credit to our nation, brave and conscious of their duty.

                  The officer in charge was allowed to put some of his thoughts about the campaign, the strategy and the problems of managing his troops to camera. He did so loyally, without sounding too critical of the high command nor seeking pity for the violence they faced.  His testimony, however, raised serious questions about the mission and the tactics being followed.

                  Their main task was to keep open a tarmac highway as a major route  between cities, suitable for commerce. When the British platoon took over from the Americans, they decided they needed to undertake foot patrols to demonstrate to the Taliban that they could control the ground. They soon discovered they were vulnerable to casualties from snipers as well as from IEDs, and opted to carry out most of their work from heavily armoured vehicles on the highway. They did not and could not police the ground as they wished.

                       They were then instructed to engage the enemy by luring the Taliban forces into firing at them so they could return fire.  They did this though they had understandable reservations. The instructions do not allow them to fire first on the enemy. This is a precaution, as the enemy does not wear a uniform or other easily identifying mark, and blends into the local terrain and local communities in ways which make  attacking them hazardous. Trying this led them to trigger ieds with  hidden trip wires. They decided not to undertake these tactics again owing to the risk of loss of life.

                        We then saw a “routine” operation seeking to clear ieds from near the highway, with soldiers on foot doing this under cover from the men remaining in the heavily armed vehicle on the highway. This led to another casualty. Soldiers moving out from a  vehicle needing to sweep every piece of land to check for explosives before they step on it are highly visible and vulnerable to concealed enemies and to concealed bombs.

                        Finally we learned that locals were blown up by an ied just off the highway, when UK troops closed the road temporarily to check its safety. A local group decided to ignore the instructions and drive on the land close to the road. This led to improved relations with local villagers who blamed the Taliban for the deaths, and made it a bit easier to police the area. The Lieutenant privately mused on how these deaths had happened owing to the presence of foreign troops to try to keep the road safe but making it a target for Taliban ieds.

                        The Lieutenant’s questions were worrying, and need to be addressed by those issuing the orders.  How feasible is it to patrol areas close to Taliban territory?  Is it wise to draw the Taliban into a fight when our troops are not allowed to initiate firing or get ahead of the enemy in action? Can you fight against an enemy which is embedded into local communities you are trying to protect?  How can you succeed in a hearts and minds campaign in the villages when most overseas soldiers do not speak the local language, and when you are outnumbered by the Taliban? Can the presence of foreign troops become an incitement to more violence by the Taliban?

                     The US and UK high commands have announced the departure of troops in 2014. The Afghans have by n ow had many years to train their own police and soldiers. Isn’t it high time we put our troops back into relatively safe bases, using them just as advisers? Isn’t it time to bring most of them home? Why should we risk more lives in these difficult conditions, now our departure has been announced?

 

Both the outgoing Labour government and the incoming Coalition government pledged to make work worthwhile. Both agreed that the best kind of spending cut was a cut in welfare benefits because out of work people had found worthwhile jobs.

Some opponents  unfairly quip that Conservatives want tax cuts for the rich and benefit cuts for the poor. They claim that Conservatives think the rich need incentives and the poor need pressures to earn. The truth is kinder and more prosaic. Conservatives want tax cuts for people at all income levels. We want tax rates that mean the rich pay more, and tax rates which mean the poor pay less. Indeed, the Coalition government with the agreement of both parties in it  has driven hard to exempt the first £10,000 of income from all Income Tax, and will doubtless get there soon. Imposing a zero rate for lower incomes is a sign that the government  wants people on low incomes  to pay no tax, not that they wish to penalise them.

There remains the more difficult issue of benefits, which has taxed governments of all persuasions. Labour in office has agreed with means testing benefits, and agreed that getting people into work is designed to get them off benefits. The Coalition government, determined to make it more worthwhile to work, then increased out of work benefits by more than twice the rate of increase of pay this year, which has set back the task of making it more worthwhile working.

The problem with means tested benefits is they have to be withdrawn, and the act of withdrawal recreates disincentives to work harder or at all. Most people agree that if you move from unemployment to working, you should lose some of the benefits the government is paying you when out of work with no income. Most people agreee that it is a nonsense to pay benefits to people with good incomes, or with substantial savings and other resources. The nice question is how do you get from benefit dependence to self support without creating a large disincentive?

You can either have a few people facing a high rate of withdrawal of benefit, the sharp cliff approach, or a lot of people facing a less dramatic rate of  reduction of benefit as it is taken away more gently. If the range of income that faces benefit withdrawal also attracts standard rate income tax, then the combined rate of tax and benefit withdrawal can be high and can act as a disincentive.

There is no way of avoiding one or other of these approaches to benefit withdrawal. The more people that can be exempted from Income tax the better, as then the benefit withdrawal loss is not compounded  by income tax loss. There has not been enough study of what rate of benefit withdrawal is possible without acting as a major deterrent to working for an income. Those settling the rates of withdrawal have to bear in mind the costs of getting to work as well as the loss of state income. The  simple truth is that all income levels the system works best if there is a fair and substantial incentive to work more, work smarter or work at all.

 

              When the government announced its two year pay freeze I asked some questions and pointed out that different departments had different ideas about what constituted a pay freeze. Whilst some thought it meant not paying individuals more, others thought individuals could still move up within grades and receive seniority or performance related enhancements. I suggested to Cabinet Office  Ministers they might like to come up with a common definition and enforcement across the civil service.

              Today’s FT reveals that they did not, and explains how some departments are more generous than others. I am in the process of collecting information to write on the general topic of public sector pay, but now find the FT has done some of the work for me which is most revealing. The net result of the pay freeze is public sector pay is increasing at around the same slow rate as private sector pay overall.

 

As the USA presses home its advantage with cheap gas, Germany is countering with cheap coal. The Uk needs to be wary of just how much a march our leading industrial competitors in the west are stealing by going for cheaper energy, to say nothing of all those coal fired power stations being added to the formidable industrial output of China.

The interesting  thing about Germany’s choice is she is doing this despite living within the EU’s complex and expensive emissions regime. The immediate cause of the dash for coal in Germany is the political decision to close the nuclear power stations. There is also the need to provide continuous power back up to Germany’s substantial renewable sector, where power ceases when the wind drops. With Germany in this mood, now would be a good time to review the EU’s legislation in this field to see if it is still needed or if it still appropriate to modern conditions.

Just how green is say offshore  wind power if you need back up stations burning fossil fuels? How much energy does it take to construct the offshore  wind farms in the first place? At what point does the cost of power become so high that high energy using industries switch from us to parts of the world keen to burn more and more cheap fossil fuel to win?

The Uk has particular need of cheaper energy for two reasons. The first is the government’s pledged strategy of an industry and export led revival. It will take cheaper energy to keep some of the high energy using industries we have, like steel,ceramics, chemicals, aluminium and glass. It will need cheaper energy to encourage more industries here, and to help give them more of   a competitive edge.

The second is the need to end the squeeze on the consumer. Real incomes have been under the cosh since 2008. A combination of tax rises and price rises has left most consumers with insufficient income to maintain or expand their living standards. The Bank has promised us success at last in getting price rises down below earnings growth. The latest fare, fuel and food price rises threaten this happy forecast.

 

Here’s a Coalition policy many of you will agree with!  They have said they intend to cut the costs of the administrative overhead in each department of government by 30% over the planned five years of this Parliament. This either cuts the deficit or pays for more useful spending. The issue is, how are they getting on with implementing it?

Much of the overhead is the pay bill for officials and quango administrators.  I thought I would have a look to see how some departments are getting on. I started with the two I thought would be the most reluctant to get on with this policy.

Energy and Climate Change show that they had 2724 employees in 2010-11. This had risen to 2914 in 2011-12, an increase of 190 or 7%.   This was despite giving 118 people exit packages in 2010-11 at a cost of £6.9 m to the taxpayer, and  23 exit packages in 2011-12 at a further cost of £802,000.

The Department for International Development  says its 1568 employees at March 2011 had risen to 1655 by March 2012, a rise of 97 or 6.2%.  Elsewhere in its annual report, it says its 2372 employees in 2011 had risen to 2449 by 2012. Either way, there was an increase. This was despite  offering 70 people exit packages at a cost of £3.5 m to the taxpayer in 2011-12.

Over at the Department for Environment, Food and Rural Affairs there has been a bit more success in cutting numbers. Total employee numbers are down from 26,925 in 2010-11 to 24,955 in 2011-12, a fall of 1970 or 7.3%.  This is after agreeing 2194 exit packages at a cost of £89.3 million.

You would have thought the obvious way to get numbers down would be using natural wastage. It should be possible to cut the workforce by  say 5% per annum without having to agree any voluntary severance programmes, simply by freezing most recruitment and promoting internally where appropriate and necessary. This would still leave scope to replace some other leavers with special skills or in special categories. We have read recently that leaving rates are currently high in the civil service, at over 9%.

It does seem that some government departments are off the pace on cutting their overhead, failing to bring staff numbers into line with the new realities. It also seems that some departments are delivering what reductions they are achieving the most expensive way, by agreeing generous pay offs to volunteers to go. That can be a way to lose some of your brightest and best people who are employable elsewhere and like the idea of a lump sum to go. It would be good to hear from Ministers  how they think government as a whole is getting on with this interesting policy.

I have recently been sent a copy of this interesting private email  from Dr Spendlove of Special Projects  to his civil service boss  Dame Lucy Doolittle:

 

Dear Lucy,

             I think your memo asking us to find ways of co-operating with Labour in opposition to avoid the U turns and difficulties the Coalition government have experienced was a stroke of genius. I am so glad you persuaded me to stay on after the 2010 election when I was down in the dumps. 

          Your suggestion reminds people of all the mistakes of the Coalition politicians where they failed to listen to our good advice. Those failures did lead to a series of policy reversals, most notably with the latest budget, as with the sale of forests.  It also  implies that serious people in the civil service  do not think they can win again, without being in any way disloyal.  The civil service is at its best when it is loyal but prudent, working with our current masters but planning  an orderly transition should that be the people’s wish. We do need to begin a serious process of preparing them for power, as some in Labour will also wish to rewrite the rules of government which have been so carefully constructed here at home with the help of the EU. They need to know in advance there is little scope for manoeuvre in the circumstances.

          Meanwhile I am sure you are alert to outstanding business with the Coalition. Now we have succeeded in implementing our plan of public spending  rises in cash and real terms in the first two years of the Coalition, the difficult years, we need to ensure that Ministers do not now implement the damaging cuts we have dissuaded them from so far. We left some very tight numbers in the more distant years in 2010. We now need to explain the political wisdom of quietly moving away from those. There is renewed interest in growth, and we can suggest to Ministers cuts now would not help it. All Ministers, will I am  sure see the dangers of unpopular cuts ahead of an election. It was a nice touch to make sure official figures for the economy take full account of the likelihood that reduced levels of public spending  growth have already damaged output. We can adjust them upwards later should it clearly emerge we have been  a bit too cautious.

        We need to be aware of a new stridency in the Conservative party over European matters. We need to ensure they are not able to opt of all those excellent Criminal Justice measures in the EU that we have helped create. There should be a majority in the current Parliament to keep them, and Labour will I am sure be understanding. I would be happy to be a secondee to Labour, as working with them might improve our mutual understanding on these sensitive issues. We also have a duty to brief Ministers of the importance of not trying to disrupt this autumn’s complex negotiations on  keeping the Euro together with any demands for the UK to get powers back or have a looser relationship. This  would be seen as very unhelpful by our partners and lead to a further loss of UK influence, which is bad enough thanks to our position on the Euro and banking matters.

          I am pleased to report that several of our former colleagues have found good jobs in consultancies and other private sector areas where they can use their wisdom and skills well. They tell me it is not too bad out there, and they of course do have the nice advantage of the generous compensation Ministers so thoughtfully provided when we explained to them the complexities of their plans to slim down the civil service. I fear we will need to make more use of outside help again, now we have lost so much talent through the voluntary redundancy programmes.

 

Yours in hope of a new assignment

 

Roy

 

 

           Yesterday the Today programme ran an interview with an IMF spokeswoman who told us cutting a deficit at the wrong time could be self defeating. She  was asked by Mr Davis if we cut £1 of deficit how much economic output would fall. She said it could do 6-10 times as much damage. He pressed her to give actual percentage figures. She said if the deficit was cut by 1% output might fall by 0.5% in a good case, but could fall as much as 2% in a bad case if the economy was already weak.

           At this point the interview should have become interesting. Surely sharp Mr Davis would ask why she had scaled her 6-10 times back to four times  with just one additional  question? Would he ask what evidence she was using? Which deficit reduction programmes had they examined?  Had she examined the cuts in deficit and spending plans  in the early 1980s and early 1990s in the UK, both of which led to good recoveries? Could she explain why Sweden had grown so well since the 1990 cuts? Why did the new Scandinavian model where growth is faster  rely on much lower public deficits than the UK or Greece?  Why do all IMF programmes demand cuts in spending and tax rises, if they now think this cuts national income? Why did they impose such cuts on Greece at a time when its economy was clearly in free fall, if they now think this will make it worse?

          Instead he let her go on to assert that cutting people’s benefits and pensions would be much better than cutting other types of public spending. He might have asked her how cutting people’s spending and general demand would help, where cutting civil service salaries would not, but failed to do so.

          No-one was invited on to debate with her, no-one was interviewed to provide balance. Surely if the BBC regards such a person as an expert they should be asked tougher questions about their research, what numbers they have produced, and why they think it is right? The interview was remarkable for giving us no actual figures or any country experience.

          Meanwhile the UK state debt goes on up and up. Are there no limits to taking on debt? Why is borrowing an extra £10 bn a month an insufficient deficit? Why does it lead to the economy declining? How would borrowing say £15 bn a month provide growth?

           Labour inherited a state debt of £290.3 billion (outstanding gilts) in 1997.  This rose to £355.5 bn by 2005, an increase of 22.5%.  By March  2008 it was up to £478.8 bn (before the Credit Crunch crisis hit fully), an increase of 65% from 1997. By March 2010, just before Labour left office, it was at £913.5bn. This took Labour’s increase in the state debt to £623bn over 13 years, or an increase of 214.7%. I am excluding all the PFI/PPP and bank debts also incurred.

           The Coalition debt reached £1163.8bn by March 2012, a further increase of £250.3 bn over 2 years, or 27.4% on their inherited base.  This means the debt to GDP ratio (just taking money borrowed via the gilt market) has reached around 77% of GDP.

            However, the Bank of England has bought in £375 bn of this debt, or almost one third of it. If the government simply cancelled this debt, and the Treasury loan to the Bank financing it, UK state debt on this number would fall to £788 bn or around 52% of GDP, a more modest proportion by modern government standards.

            The government  is not rushing to cancel this debt. No doubt it is worried how such a course of action would be perceived by the markets and media. It has four options for its quantitative easing programme:

1. Carry on with more of it. It keeps the rate of interest on government debt at very low levels, making the government’s excess spending seem affordable.  

2. Stop new quantitative easing, but leave the purchased bonds with the Bank of England. As individual bonds are paid back, the Bank would reinvest the money in other gilts from the market, keeping the QE amounts intact.

3. Allow the repayments of gilts that occur to reduce the amount of gilt edged stock owned by the Bank over time, gradually working it out of the system.

4. Sell the Bank’s gilts back to the market, to recoup the created money from the system.

Memo:   Between 1992-3 and 1999-2000 Cyclically adjusted UK net government borrowing was slashed from 5.5% of national output to -1.1%, a turnround of 6.6%, and the economy expanded by around 3% per annum

Between 1980-81 and 1982-3  Cyclically adjusted net borrowing was cut from 3.4% of GDP to -1.4%, a reversal of 4.5%. The economy started to grow As the programme was completed and grew continuously until the ERM disaster at the start of the next decade.

 

Conversely, large increases in the Cyclically adjusted net borrowing occurred piror to the mid 1970s slump and IMF visit, and prior to the Credit Crunch of 2008-9.