The Coalition planned to raise an extra £11,500 from the average family of   four by 2014-15, compared to 2009-10. (June 2010 budget)

           They needed all this extra tax to cut the deficit, as Labour had been spending so much more than it collected in revenue.The country cannot carry on living on a rising overdraft for ever. They also had  to pay for the extra £6000 of  current  public spending for every family of four that the Coalition itself planned. Even allowing for the cuts in capital spending, the Coalition needed a big tax rise.

         The Coalition decided to live with Labour’s proposed rise from 40% to 50% on higher incomes. They increased Capital Gains Tax from Labour’s sensible 18% to 28%. They increased Stamp Duty on property. They raised VAT to 20%.

        The only one of these tax rises that produced some of  the extra revenue they sought was the increase in VAT. The higher rate of Income Tax accelerated the departure and the decline of high end incomes in the UK, and revenue fell sharply.  The new CGT rate is forecast to yield lower receipts this year. The high end Stamp Duty has led to a big slowdown in sales of expensive flats and houses around the £2m plus mark in Central London, hitting revenues and mobility compared to estimate.

        The government has stuck to its current spending plans. The going gets tougher on these next year, when there are smaller increases than in the first three years. It is trying to buttress its falling tax revenue compared to forecast by exhortation and loophole closing. It is seeking the elusive extra billions from rich people and companies that all hard up governments seek.

         On Friday I was reminded by Andrew Neil on the BBC Politics programme just how far and fast the UK Tax Code has expanded under this government. As smart accountants, lawyers, tax advisers and Finance Directors find new legal ways round the tax code, so the Treasury hits back with yet more loophole closing measures.

        If you want to collect more tax there is a simple motto you need to follow – fewer breaks and lower rates. Higher rates and more breaks is never going to bring in enough revenue for this high spending state. It is merely going to produce an ever bigger and more complex tax code. It creates more division and bitterness within the society,as groups squabble over whether everyone is paying enough tax. The richest are the ones who can afford to leave altogether, or who can rearrange their affairs to avoid tax legally whatever the regime.

 

 

 

          How many EU laws and decisions does it take before people admit we no longer are self governing?  This was the central question I asked during the recent Parliamentary debate. Law by law, Directive by Directive, decision by decision, our democracy is being taken away.

            Of course Parliament remains sovereign for the one single reason – it could always repeal or amend  the 1972 European Communities Act. The day  that option becomes impossible or too remote for anyone serious to contemplate, then we have to accept that sovereignty has passed from our islands to Brussels. An In/Out referndum promised by a party that could win a General Election keeps that idea very much alive as an option.

           This same process of democratic erosion and centralisation has affected the other member states as well as the UK. Why is it only the UK that worries about it? There are a variety of reaons.

           On Thursday evening I was on a panel answering questions about the EU economies  and the Euro. The Moderator when asking the first question characterised it as one needing a European to answer first. She passed it to the Dutchman on the panel, saying he was European. It was as revealing as the moment as when I was asked if I had visited Europe recently by someone who thought I was too Eurosceptic. Even the most Euroenthusiast of UK citizens do not automatically see themselves as Europeans. They see Dutch, German and French people as Europeans, but not us Brits. The EEC was sold as a trade agreement, and so it remains in many British minds. It is not a warm feeeling in most British hearts.

          UK history is different from the history of so many continental countries. Invasion and occupation by Italians and French was two millenia and one millenium ago. In more recent history the Uk has defended her liberties and defeated continental aggressors, be they Spanish, French or German. As a result we do not fear the large neighbours as so many EU countries do. We also think that post 1945 the main powers on the continent are peace loving, and well behaved thanks to NATO and the US powerful watch. We do not think another western European war is at all possible, with or without the EU.

            The keenest members of the EU are the poorer countries. They join to get their living standards up closer to the rest. They join to benefit from subsidies and transfers to them from the richer countries. It is a transfer or subsidy union. They welcome EU laws, because they anticipate the EU law will be better and more consistent than the law codes they were used to under Russian tyranny or the rule of the Generals.

             The UK has to pay many of the bills for the subsidies, so the subsidy union is not popular here. The UK has plenty of laws of its own, and knows it can always change governments and lawmakers if it does not like its domestic laws. It sees EU interference in the lawmaking process as undemocratic and annoying.

             The UK is a gobally engaged island. It is a dynamic place that grasps the huge changes that the rise of Asia and the dominance of the internet are causing. It means we will always have a different view of the EU from the rest. It also means we will not join their monetary, fiscal and political union. We do need a new relationship as soon  as  possible.

The new Governor of the Bank will have unprecedented powers to direct and regulate the UK banking and monetary system. He will need to work closely with the government of the day, so that Bank policy is complementary to fiscal policy and to the government’s legislative priorities. He will need to shape and lead the team at the Bank to use the new powers wisely, in the national interest. He will need to decide what to do with the large QE programme he inherits, and what to do about the malfunctioning banks still with large state shareholdings.

Let us hope the new Governor is someone with good judgement about the state of the UK economy and its position in the world. I suggest there are two crucial tests of an individual’s past judgement. Did they realise the Exchange Rate Mechanism would be damaging to the UK? Did they understand how tying the pound to the DM in the early days would lead to faster inflation, and then the opposite once the inflationary effects undermined confidence in sterling? And did they read the 2005-10 cycle correctly? Did they understand that credit and money was too loose in the period up to 2007, and did they understand that this was corrected too abruptly in 2007-8, jeopardising the liquidity and even the solvency of some banks?

Did Mr Carney see the problems with ERM membership prior to our entry, and the dangers of DM shadowing. Did he think the previous policy of money targeting , as the German Central Bank did, was a safer way of controlling events? Did he argue for tighter monetary control with higher interest rates in the boom phase prior to 2007, and argue for a more rapid injection of liquidity in 2007-8? This approach should be allied to controlled administration for any bank that could not meet its obligations, is something that has now been adopted as policy for future crises. Clearly when he took over as Canada’s Central Bank Governor he did understand the need for easier money. Let us hope he has studied the unhappy monetary history of the UK and formed the right conclusions from the torrid and bumpy ride the Establishment gave us, both through its espousal of the ERM and its encouragement of Boom/Bust in the noughties.

Today the priority is to assist the government in its wish to promote faster growth. This in turn will help bring the budget deficit down. The Bank needs to relax immediate controls over bank capital and cash, whilst maintaining a more prudent level than in the period prior to 2007 to assist the recovery. There will be time to demand higher levels of cash and capital once the recovery is underway and as banks generate better profits. The Bank also needs to ensure its current policies of QE and Funding for lending are well designed to maximise the beneficial impact of these extraordinary interventions.

 

 RBS published some interesting figures on the US. Over the last twelve quarters US public spending has fallen in ten of them, making a total decline of 6% over the period. Despite or because of this tightening of the spending stance, the US economy has grown overall  by 4.8%.

In the UK the last eleven  quarters (since the Coalition arrived)  have seen a significant rise in real public spending but only a 0.4% increase in output. In most quarters in the UK the public sector has made a positive contribution to output growth.

Those who argue the US has grown faster because Mr Obama has avoided austerity whilst the Coalition has gone for it should look again at the figures. Mr Obama has not increased Federal spending by sufficient to offset state spending declines, so the US has been much tougher on public spending overall than has the UK.  Why haven’t the US cuts in spending led to economic decline, as some argue here?

The webmaster is changing the technical arrangements for the website and has asked me to advise you all that there will have to be a temporary suspension of the comments service whilst he loads the site onto a new system.

I am sorry for any inconvenience, but am told we will have a better service thereafter. I will of course publish a daily blog tomorrow as soon as possible.

          When I went to Wellingborough and back to make my contribution to the Corby by election, I was told to catch the 3.30pm outbound, and get the late train back after canvassing and giving a speech to a dinner.

           I was impressed by the refurbished St Pancras. The shopping centre there is good, and the old building has been stylishly restored and extended. If you want to buy gifts or have a coffee I can recommend it. It was altogether more difficult if you wished to be a train passenger on “national” routes.

           I walked the full length of the station to find the ticket office, as the more accessible part of the station is taken up by Eurostar facilities. I asked for ticket options and prices.  As this was a political visit I was of course paying for my own ticket.  I bought a first class return to Wellingborough, as the price they quoted for that  sounded very reasonable. I bought my ticket just before 3pm.

            I had to wait by the ticket office as the only indicator board I could see with train departure times and platform indications was near the ticket office. There was no board near the steps up to the train gates.  At around 3.15 they placed a platform number up for Wellingborough. I had to walk back down the station to find the stairs up to the national platforms, and then walk back to the gates which were directly above the ticket office. As the ticket I had bought seemed good value and stated on it it was a restricted ticket without having on it how it was restricted, I checked with the man at the platform gates. The last thing I wanted was to end up in the wrong carriage with the wrong ticket.  He told me the ticket I had been sold was not valid for the 3.30. I asked if I could pay him a supplement to travel. He said No. I asked if I could use it to travel standard class instead. He said No. He told me I had to walk all the way back to the ticket office to change the ticket. I was naturally concerned, as owing to the late posting of the platform number  I was running out of time.

                 I did as instructed. I queued at the ticket office where I had bought the ticket. The employee told me when I got to the window  that I could not change that ticket in that ticket office. I had to go round the corner to another ticket office!  I did so. There was another queue. Someone kindly let me ahead of them given the time constraint. I  got to the window and had to pay a supplement to travel on the 3.30. They issued me with a third ticket. (The original ticket was two tickets, an outbound and an inbound).  By running fast I just managed to get on the 3.30, having been at the station more than 30 minutes before its departure!  What a great start to a journey.

                  I also took the train to Durham to do Any Questions. The programme supplied me with a standard class single, and said they would drive me home, as the return time was after the last train. I was travelling from Reading to Darlington on the cross country service. The door to door time of my journey was a massive six hours and ten minutes.  That included a couple of taxis to travel around fifteen miles that the train could not offer. The return journey door to door by car was four hours forty minutes. The car was also more comfortable.

                 I was fortunate to have a seat reservation on the train, as it was crowded for much of the journey, with people having to stand. Whilst very few people wanted to go a long distance as I was doing, the train regularly  filled up to go one or two stops. That meant people standing for half an hour or more.

                   I do think the railway could do more to improve the service it offers people who want to travel.

 

              The public seems to have a greater sense of public spending crisis than the government. Many voters are apprehensive about the rapid build up of debts, and understand that we  and our children will have to repay them in due course. This makes it more difficult to gain and hold support for expensive policies.

               The public would like the UK to do less by way of military intervention abroad for a bit, whilst we are sorting out our finances. It would be a popular move to accelerate our departure from Afghanistan. There is no great appetite to get dragged into another war , this time in Mali.  There is also a fear of more members of our armed services losing their lives in difficult places, where their own actions have to be curtailed or constrained to avoid harming the local civilian population.

                It is good news that the government has ruled out sending in troops to fight, but there are worries about mission creep and questions about how much spare money and military resource we have to commit to yet another difficult civil war so far away from home.

Jonathan Portes wrote a critique of my piece on fiscal stimulus on his blog. I felt his response showed we are making some progress in promoting a better understanding of current UK policy. Despite a personal attack that was uncalled for, he agrees with quite a lot of the analysis I have been offering.

Mr Portes agrees that overall public spending has not been cut. He states ” Individual spending cuts do not show that spending is falling overall, and on that Messrs Redwood and Nelson are correct and make an important point”. I am glad we all now agree with the Treasury figures, which are very clear. I have always accepted that capital spending has been cut, and some individual programmes. Total current public spending has been rising in cash and real terms 2010-12. Total cash public spending has also beeen rising overall.

He goes on to say “As yet, so far, there has been relatively little (overall) austerity in public services, with health and schools protected, though local services have suffered”. Education is of course the single largest local service, and has been protected from reductions.

He then points out that there has been austerity in the private sector thanks to tax rises – and I would add thanks to inflation and the price of public services and regulated utilities. I have never denied this and have stressed it in most of my pieces.

The nub of his remaining disagreement with me is over fiscal stimulus. I use the normal definition that a fiscal stimulus is state borrowing to spend beyond its means, adjusted for the cycle. He thinks it is only a stimulus if the state borrows more next year than this year, an unconventional analysis. Each year’s borrowing is new money seeking to create more activity than will be paid for by taxes.

Let us compare his treatment and mine. If the state borrows a cyclically adjusted 4% of GDP in Year 1, 5% of GDP in Year 2 and 9% of GDP in Year 3, then borrows 8% in Year 4, 7% in Year 5 and 6% in Year 6 Mr Portes says there is only a fiscal stimulus in Years 1-3. I say there is a fiscal stimulus in every year. The fiscal stimulus is rising in years 1-3, and falling in years 4-6. More importantly the fiscal stimulus is larger in every year of years 4 to 6 than it was in years 1 and 2. Mr Portes disagrees with this, as there is no stimulus in his world in the later years. His definition is unusual. Even on his definition, as borrowing so far in 2012-13 has been higher than in 2011-12, he should concede there is some stimulus. He does accept the economy has been flat rather than falling over 2012 as a whole so the cyclical affects should not stop this being true.

He agrees with me that if you take an extra pound in tax and spend it in the state sector that is not reflationary, as the private sector can no longer spend that same pound. It is of course possible to argue that in some circumstances there might be a favourable timing difference – the money might pass from someone in the private sector who would otherwise save it, to someone depending on benefits more likely to spend it. But equally the money might pass from someone spending all their income in the private sector who then has to spend less on other things to pay the extra tax, to someone on £150,000 a year in the public sector as a bonus or payrise, or as a contract payment to a well paid private sector consultant, which might be saved. You also need to look at the second round effects. Saved money is not destroyed. If the saver deposits it with a bank the bank might lend it on to someone who does spend it. If the individual invests in a company, the company is likely to spend the saved money.

I agree with his conclusion that “I do think it is important not to exaggerate either the magnitude or the impact of the austerity in the UK”, as long as he is talking about the public sector 2008-12.

Addition:

Following an exchange with Mr Portes he has apologised for some of the words he used:

“First, and most importantly, I wanted to apologise for what you regarded as a “personal attack”. I honestly didn’t intend it as such while writing it – Ido think the Tresasury view is a basic error – but re-reading it I agree it was uncalled for and unnecessary, so I’ve removed a couple of sentences. Apologies again”.

I accept his apology.

I listened carefully to the Today programme interview of the Shadow Foreign Secretary on Saturday morning. It was a typical Today interview with plenty of interruptions and assertions by the interviewer. As a result we got less out of it than we might had it been more forensic.

Labour made clear that they are against an In/Out referendum. They think the threat of one will lose us jobs and investment. They are now unable to rule out one for ever, but they offered no hope of one anytime soon. Their modification of their opposition to one amounted to no more than “You can never say never”, a stupid phrase in politics. I can always say “Never” to legalising murder, for example.

What we needed was an interview which probed the small window of opportunity for Labour to want an In/Out referendum. On what was said it is difficult to believe they would ever seriously consider one. If they fear that the offer of one now is damaging to jobs, why wouldn’t the offer of one in the future be similarly damaging in their view? If we do not need one now, after an intense period of movement to a common European governemnt in so many areas, when might we need one?

I can’t help thinking the Labour’s position on this is unsustainable. They are the party in office that forced through three major Treaties, Nice, Amsterdam and Lisbon, against the strong opposition of the Conservative party, and without any referendum to ask UK voters if they accepted such a huge transfer of power. Their decision to do this is very unpopular, and makes governing the UK now very difficult as Ministers so often find they do not have the power to do what is needed. The Single European Act and Maastricht were different, as Labour in opposition supported the general principles behind those changes, and the government opted us out of the single currency, and main point of Maastricht. Both main parties were persuaded to offer a referendum should they ever want the UK to take up the main point of Maastricht, joining the Euro. Nice, Amsterdam and Lisbon were unacceptable, because the Opposition and much of the nation fundamentally disagreed with the large changes they made to our ability to govern ourselves.

Maybe someone in the weeks ahead will succeed in questioning Labour more intelligently over their stance. How can they refuse the British people a say on this mighty matter? Have they seen the polls on how popular a referendum would be? In what circumstances would they rethink? Are they seriously planning to fight the 2015 election on the wrong side of this issue? Do they agree that the UK cannot join the fiscal, political and banking union the Euro area now needs? Do they not think these changes are large and will have some impact on the UK? How would they wish to guide the UK during an intense period of European centralisation?

On the Today programme the issue was muddled by discussion of referenda on any further transfer of powers. There Labour has accepted the new settlement, that a further transfer would need a vote to approve it before it could happen. That is now a relatively minor matter compared to the large issue of do we want to stay in what we have got? How does Labour plan to get the nation to love the huge changes to our constitution that Nice,Amsterdam and Lisbon inflicted? Why didn’t they bother to explain them and persuade us at the time they rammed them through the Commons?

I was interested that my brief blog on Mr Cameron’s Europe speech got the biggest ever response. Clearly you do not need my thoughts to get you going, when you are interested in the topic.

Now some of the dust has settled I thought I would put down some of my observations on the EU debate brought on by that speech.

The first thing to say is that all those who think the UK public are not interested in the issue of the EU or are turned off by parties banging on about Europe need to think again. The press and public interest has been big. The Conservatives have gone up in the polls whilst holding a very public conversation about how far and how fast we should go in a Eurosceptic direction. Just as Mr Cameron got a big improvement in ratings when he vetoed any UK membership of the Fiscal Treaty, so too his ratings have gone up during debates over that speech.

The second is to say to all those who want deeds not words, on this occasion the words matter and they were good. The EU world will not be the same again, now a UK Prime Minister has dared to explain that we do not wish to join their union. It is no longer a question of a slower pace of travel in the same direction, no longer a question of a few opt outs.

Many of you will agree with these words:

“We have the character of an island nation – independent, forthright, passionate in defence of our sovereignty. We can no more change this British sensibility than we can drain the English Channel.”

“First, the problems in the Eurozone are driving fundamental change in Europe. Second , there is a crisis of European competitiveness… And third there is a gap between the EU and its citizens which has grown dramatically in recent years. And which represents a lack of democratic accountability and consent that is – yes – felt particularly acutely in Britain.”

“The European Treaty commits the Member states to lay the foundations of an ever closer union among the peoples of Europe…. for Britain it is not the objective”

“power must be able to flow back to Member States, not just away from them.”

“democratic accountability – we need to have a bigger and more significant role for national Parliaments. There is not, in my view, a single European demos.”

In the UK “People feel that the EU is heading in the wrong direction that they never signed up to. They resent the interference in our national life by what they see as unnecessary rules and regulation. ”

“It is time for the British people to have their say… I say to the British people: this will be your decision”

The third observation is this speech has made many on the continent think again. They were happy to ignore UKIP polling 3% in a General Election and 20% in a European election, with a Conservative Eurosceptic choir in Parliament demanding change. They first realised there was something more serious when 100 MPs voted for a referendum. It is altogether more serious to have the leader of the largest party and the Prime Minister saying that the EU is not working for the UK and offering a vote on whether to leave.

Heavyweight German opinion has let it be known that they agree with various criticisms Mr Cameron has made of the EU. They have also indicated that if the UK electorate did vote out, they would of course want a proper Free Trade Agreement with us to defend their most important export industries. Dutch opinion has included voices who like Mr Cameron’s idea of Member States having much more power and say over a wide range of policy. Some have spoken out about the tribulations the Euro is now causing its members.

It is early days. Much will happen before we get our promised and much needed referendum. However, the game has changed. It is difficult to believe that Mr Miliband can hold his position for long that Labour neither wants to negotiate a new relationship nor wants to give the UK electors their say. If electors respond positively to the pollsters saying they want this referendum and want a new and different relationship for the UK with the EU, we could see more progress.