I have been very busy in Parliament this week. This causes delay in postings.

To speed it up it would help me if you did not

a) refer to other websites, apart from reputable official source websites or well based publications that I know

b) splash unsubstantiated allegations around about individuals and organisations. I do not have the time or investigative resources to check them out. The general criticism can be made without calling people names and using provactive adjectives.

In future I may just not post contributions which persist with difficult material.

            Whilst I believe some tax rates are self defeating, raising less revenue than lower rates, I do not think cutting the main rates of Income Tax or even Corporation Tax would lead to a surge of revenue in the first couple of years. Clearly VAT cuts would lose us revenue, just as a VAT increase was the one rate rise which did bring tax revenue gains. A lower tax economy will in the longer run be more successful, and will bring in more revenue as the growth accelerates.

          Mr Cameron in his recent economic  speech argued that the 50p to 45p tax change will bring in more revenue. I agree. I suspect lowering the rate ot 40p would bring in more as well. The current CGT rate is clearly counter productive, with a forecast fall in revenue this year. It is the most easily avoided tax, as people do not have to sell and realise gains, or they can sell something at a loss as well to offset. Why impose rates that lose revenue?

          This leaves the government and its tax cutting critics at odds over the main case. “Cut tax rates”, say the radicals, “to energise the economy. In due course it will pay off, but in the meantime we might have to borrow more”. Keep rates high, counters the government. We need to show “we are all in this together, so we need to tax hard anyone who does work and invest. Try to keep the borrowing down, as otherwise we might lose the markets confidence”.

           There is a mid point between these two. The tax cutters are right, that lower tax rates would stimulate more growth and create more private sector demand. It is tempting to try it. Give tax cuts to all. However, state  borrowing is too high and it would seem perverse to want to increase it. The government is right that it needs to get the deficit down.  So find some popular cuts in public spending that would pay for the tax cuts in the early stages, before the growth generated the extra revenue. I have often set out here easy or popular cuts. Start with getting our troops home, cutting overseas aid,  sell some state owned banking assets and stop Network Rail dealing in derivatives for starters. Cutting out expenditure abroad by the UK state is doubly helpful, as the money spent does nothing to stimulate UK demand at the moment, and having to buy foreign currency when exporting the money is another force selling the pound and driving up UK inflation.  I will look in more detail at this in due course.

          According to global warming theory we should be getting early springs and warmer winters. The most enthusiastic global warming theorists were busily forecasting the end to snow in the UK winter looking forward to this decade. They said the winters would not be cold enough to kill off unwelcome bugs. They said spring would come a lot earlier owing to the global warming trend.

         The last three years have seen some tough and snow ridden winters here in the UK. This March we have sub zero temperatures, and on Tuesday morning people were still stuck in their cars in the snow near Gatwick airport from the night before.

          Doubtless we will be told this is just more weather, and less climate. We will be told that the long term trend of temperatures is still upwards, despite the apparent hiatus in rising temperatures worldwide for the last 16 years. The fact that our fuel bills are so high, and that it is so perishing cold in March makes global warming theory a difficult sell to many people. Understandably many people are far more worried about keeping warm and how much it is going to cost. Many businesses are worried about whether it is still economic to make things needing lots of energy in the UK, or whether the intention of EU policy makers is to ensure more and more of the high energy using activities take place outside the EU altoegther , where energy is more realistically priced.

          The Uk is short of roadspace, electricity generation capacity, fast broadband, airport capacity, gas storage, deep water port capacity and homes in the right places. Most people agree it would be good to have more of all or most of these. Most people agree it would be good if the building and construction industry had more work, before its underlying capacity to work is reduced more permanently.

          The government is involved in these matters. Businesses and individuals need planning permission to build. They need Building Regulations approval, and  Health and Safety approval. In cases like energy and aviation the government is involved in pricing decisions and special taxes.It does not mean, however, that the government can or should own the assets and build new ones out of taxpayers money.

            There is a lot of money around in pension funds, insurance funds and held by individual savers. The income  returns on this money are now very poor if you try to stay in low risk assets. If you keep it on deposit or place it into “safe” government  bonds the income is small. Many say they would like some new assets safer than shares that would give them a better yield.

           The government should be able to work with the private sector to develop just such instruments to finance the infrastructure projects we need. The cashflows on a popular tollroad like the Dartford Crossing  or from a baseload new electricity power station are good and reasonably reliable. Finance for such projects could be available where the investor agrees to make money available for say 25 years in return for an income of say 5% or so. The bonds could be traded on the market like government bonds, so you could get out long before the repayment date.

             Many of the potential projects are held up. The government is trying to address the delays. More progress is needed to grant the permits, licences and the planning permissions and settle the tariff regimes so more projects can go ahead.  It would be quite possible to have a much larger capital programme largely financed by private money. So far this has proved elusive, as there are so many obstacles in modern UK and EU government that can get in the way.

          The immediate task of providing more cheaper energy is something we have often discussed here. Ministers do need to revisit damaging EU energy policies which are pricing us out of international markets owing to the business bills, and making it very difficult for many people to afford the domestic fuel bills.

The Coalition government has some sympathy with the idea that the public sector needs to boost its own capital investment. The Chancellor has made modest increases to the inherited much cut plans. He does not do more, because he says if he undertook to borrow more markets might lose faith in his fiscal management. If markets drove up the cost of state borrowing, that will take demand out of the economy as interest rates generally rise. That not only hits borrowers, but also undermines confidence and knocks business. It would of course offer some offset as savers had more to spend.

I think there is a larger problem with rolling out big public sector capital programmes. So often the projects the public sector chooses fail to raise productivity but instead gives the state large new future liabilities. The state has to maintain and staff the new buildings and pay the often large losses on the trading assets acquired. The UK is not competitive enough. It needs to raise productivity. It needs to have an affordable public sector. The wrong kinds of public “investment” can make these aims more difficult to achieve.

Some might think, for example, that a new library would be a welcome project. The state then has to provide tax revenue to pay all the future running costs of the library for many years, as it will not bring in any revenue. Meanwhile it leaves open the question of how and when will the UK adapt to the new technology of the web and ebooks. Some believe that HS2 is a crucial economic project that can open up business to the North. However the business plans show it will be heavily loss making and struggle to attract enough passengers. It is twentieth century technology, when China is pressing on with maglev, and the US with its digital revolution allowing good communcations from remote locations.

It seems unlikely that the state can come up quickly with a series of projects that could raise productivity in the state sector, thereby boosting growth and helping reduce future costs of state provision. Short of that it is difficult to see how an enhanced public sector capital programme will lift us out of low growth. Japan has tried this for many years, and just ended up with even more massive state debts than we have. Tomorrow we will consider a larger  privately financed capital programme. This has the advantage that the projects need to meet commercial tests, and do not lumber taxpayers with any failures.

In the run up to the Budget there are three main families of  proposals on offer to boost demand and stimulate growth.

There is the public sector led approach. People argue that the state can still borrow very cheaply, thanks to Quantitative Easing. The state should therefore borrow more to finance state investment projects. They argue that building new schools and railway lines would boost output. Capital budgets which were cut substantially by the outgoing Labour government, largely confirmed by the Coalition, should be temporarily restored.

There is the private sector led approach.  People argue there needs to be tax cuts. The private sector has so far experienced a much tougher squeeze than the public sector overall. If people were allowed to keep more of their own money to spend, it would provide a welcome boost to demand. If companies could keep more of their profits,or could generate more profit in the first place thanks to lower tax bills, there could be an enterprise led revival.

There is the bank led approach. If the banks can be mended and the Central Bank can push money into the banking system from Quantitative Easing, then people argue there will be more credit extended. People will be able to afford new homes and new cars and other goods, there will be more demand. Businesses will be able to borrow to invest and expand.

I will provide a critique of each of these over the next few days. As readers of this site will know, I do think the priority is to fix the banks to allow them to finance a more normal recovery. Tax rates that are cutting the revenues should be reduced. Any other tax reductions to boost people’s spending power  which would be welcome has to be matched by reducing wasteful public spending. More capital investment is needed, but should be undertaken mainly by the private sector.

                 The Office of Budget responsibility and the Bank of England have been famous for getting their forecasts of growth and inflation wrong in recent years. They do so for a common reason.

                They both believe that the UK has a trend rate of growth similar to that before the 2007-8 financial crisis, of more than 2% per annum. They therefore believe that the current level of  output is well below what it should be – there are “missing years” since the crisis hit. As a result they conclude that the economy can be given extra demand through borrowing and printing money  without causing inflationary pressure. The OBR has also believed that there would be a “normal” cyclical recovery from the large downturn, to get the economy back to its “trend”.

              So far none of this has come true. Inflation has been obstinately high in the UK, hitting more than 5.2% on one occasion at a time when the Bank said it should be much closer to the 2% target owing to large unused capacity.  Growth is now forecast by the OBR to be only half the level this Parliament of its 2010 forecast, and that is still optimstic by the standards of  other forecasters.

             Two of the main points I argued in the Conservative Economic Policy Review published shortly before the crash were that the Uk reached an unsustainable level of activity based on excess borrowing in 2007, and that its future trend growth rate would be around 1% lower than the post war average. The big figure for future  trend growth would be 1, not 2.  I hope I was not too optimistic.

            The trend rate of growth is lower and is likely to remain lower for two important reasons. The first is demand and output was buoyed  up by a massive extension of credit in both the private and public sectors prior to 2008. The Central  Bank induced crunch makes sustaining the levels of private sector credit impossible, leading to a deflation in the private sector. Few want to return to the excesses of private sector lending and borrowing prior to 2008, though it would be good if a new generation could have access to mortgages and business finance on a sensible scale.

         All political parties agree there is a limit on how much extra debt the public sector should take on.  The outgoing government pledged to halve the deficit between 2010 and 2015. The incoming government first pledged to eliminate the structural deficit over this time period. Both have had to suggest delaying adjustment, but neither say the public sector can or should go on adding to its borrowing at recent rates.

         The second is government raised the proportion of the economy represented by public sector activity to a peak of 50%. The public sector in the UK has a very poor productivity record, so a larger public sector holds back growth which rests on productivity advances. In large parts of the public sector there was no productivity growth in the first decade of this century, whereas manufacturing as a sector has sustained a lively rate of productivity growth. When manufacturing only represents 10% of the economy this has limited impact on our general living standards.

          In subsequent posts I will examine what if anything can be done to raise demand in the economy. I will also look at the productivity issue. We can only get richer on average by working smarter and adopting productivity raising technology. How is it going to be done?

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.