I am sending the following letter to the Energy Minister. It reinforces the points I made to him in the recent Commons Committee (available on the site under Debates on renewables)

Mr John Hayes MP
Minister of State, Department of
Energy and Climate Change
3 Whitehall Place
London SW1A 2HH

26 March 2013

Dear John

I am worried about the future reliability and costs of our electrical power system. In recent years there has been a preoccupation under EU policy with introducing high cost renewables, primarily wind farms. These require back up from conventional power plants for periods when the wind does not blow. Now under another EU Directive there are plans for the accelerated closure of our coal fired and some oil fired stations which have generated an important part of our power in recent years. This week saw the announced closure of 2000MW at Didcot at the end of the month, and 1000MW at Fawley. There are also plans to convert Drax to burn processed timber, a dearer fuel than coal.

The UK has a growing population. The government is pursuing an industrial strategy designed to increase the volume of energy using manufacturing based in the UK. Both these require more power to be available. We need cheaper power as part of the package to encourage more industrial investment here. It is taking time to grant the permits and find the right incentives to get new combined cycle gas and nuclear power stations built. In the meantime we need to worry just how the lights will stay on post the closures.

I urge you to go the EU And say the UK needs a longer transitional period for phasing out the coal power stations. We need to have in place not only all the extra renewable capacity, but also the standby back up capacity that windpower requires. We need to have the additional capacity that a rising population and more industry needs. The aim should be to negotiate a longer phase out period to get us over a period of vulnerability in our power supply.

I suspect we can attract support for modifications to the EU rules, as other countries find themselves in similar difficulties. Germany is especially hard pressed given her decision not to use nuclear. If , however, the EU refuses to co-operate we might need to keep the stations open anyway and pass a suitable short UK law saying we are modifying the EU requirements owing to an overriding national interest.

Yours ever

The Rt Hon John Redwood MP
Member of Parliament for Wokingham

CC: The Rt Hon George Osborne MP, Chancellor of the Exchequer

PS Now John Hayes has been moved to the Cabinet Office and Michael Fallon takes over at Energy, this letter will fall to be answered by him automatically. I will also highlight it to him by sending him another copy in his own name.

 

            After five days it was a draw. The last England versus New Zealand test produced no winner. The series produced no winner. Yet the action of the last day was fantastic. Both sides and their fans can bask in acts of glory and heroism, resulting in an honourable draw under the rules.

          In the spirit of cricket the New Zealand team website salutes the amazing innings of  Matt Prior, 110 not out  from batting 269 minutes. His innings, along with Bell’s brilliant 352 minutes of resistance, and Stuart  Broad taking 137 minutes to score very few, allowed England to save the match. Meanwhile a part time bowler Williamson  took two wickets in the same over to give New Zealand a chance of victory and ended with astonishing figures of 4-44. Their seamers strode in energetically and purposefully for the whole day, always leaving their fans with the belief that they were going to win. When Boult had the ball in his hand England hearts wobbled.

             It was great box office. It broke all the rules of other games – it took too long, it had no result, one of the teams simply had to spend time and absorb pressure. It made brilliant drama. The fact that both teams can praise the other after such a forceful encounter  is the true spirit of cricket.

 

 

 However you look at the UK state’s finances, any  rational person has to conclude the Uk state is spending too much. Labour and Conservative governments have in the past found that 38% of National Income is about the  maximum level you can impose in  taxes. Try to get it higher and rich people leave the country to avoid Income Tax, people stop selling assets at profits to avoid CGT, they drive less to avoid fuel duty, they spend less because their incomes are squeezed leading to less VAT and the rest.

This means that the long term rate of spending has to be lower than today’s. Even allowing for the current state of the cycle, it would be unwise to continue spending at current levels on a sustained basis. Of course the best way to get to these lower levels is through growth, avoiding painful cuts in spending. However, growth is elusive, and some action does need to be taken on the spending side.

There are four main ways of cutting current spending. The first is to idenify things we are spending on that we do not need, we do not like, or can be put off for a bit. In this category I would choose  cuts to Overseas Aid for the time being until we have recovered the fiscal position. I would   withdraw our troops  from Afghanistan and Germany  with no new foreign military adventure for bit. I would cut the large subsidies being paid for green energy, as we need to get energy costs down . We should slim down the programme of industrial and business subsidies and the costs of the Business Department, as Dr Cable proposed in opposition when he suggested scrapping it. We should negotiate a new relationship with the EU as we cannot afford our current membership.

The second is to manage necessary programmes more effectively. Welfare is a case in point. I do not want to take money away from the disabled. I do want to change future eligibility for benefits. We should say to new arrivals in our country that they have no entitlement to benefits for a period of years, until they have built up some contribution record under National Insurance. We should invoice health tourists seeking treatment for non urgent conditions on the NHS. I am pleased to report the government is going to limit  entitlement to subsidised housing, to make sure it goes to deserving people who have been here on a waiting list. Mr Cameron announced some welcome moves in this direction yeasterday, but may need to go further.

The third is to have a drive for greater public sector efficiency and higher quality at lower cost, something that industry does every year. I have highlighted here before the excess equipment bought and not returned to the NHS. The stock levels in many public sector organisations are very high. A period of destocking would cut inventory costs, reduce wastage and write off by encouraging earlier use of stocks, and reduce storage and warehousing costs. The digital revolution should be more strictly applied to clerical tasks in the public sector. Capital spending should mainly  be allowed only where it makes a recognisable contribution to lower cost and higher quality service. The gross inefficiencies of the nationalised rail network need to be tackled more radically, to cut the subsidy.

 

The fourth is to find assets and activities which can be transferred to the private sector, releasing money to the state. I would start by breaking up RBS and selling the pieces to the private sector.

 

 When I replied to Caroline Lucas in the Commons during the Budget debate, I wanted to highlight the genuine hardship and economic harm that her party’s policies are inflicting on the UK.

      The Green party has been the most successful of all the single issue parties that have grown up. In  other countries the Green party has made it into Coalition governments, and in the UK they have been in coalition administrations in local councils. They have an MP in the Commons, uniquely amongst such parties, which gives them more of a voice though only one vote on national matters.

             Generally, they have succeeded in persuading many people that

1.  There is global warming,

2 It is caused  by too much human generated CO2,

3. That global warming is far worse than global cooling,

4. That we need to stop the extra CO2 so we can stop the warming

5. That stopping the CO2 has mainly to be done by imposing very high tariffs and charges on people to cut the use of energy by all but the rich

           All of these propositions are challenged, but the general establishment view is that the “science is settled”. It is my view that the policy is far from settled. Dear energy is one of the most unpopular policies being followed today, and needs to be radically changed.

          As I look out of my windows at a deep snowfall in  late March, and wonder just how big the gas bill is going to be to keep the homes warm at a time of unseasonal coldness, my main concern is  not whether this is climate or weather. It certainly makes it much harder to sell to people the idea that they need to make a further financial sacrifice in the name of fighting global warming when it so unseasonally cold.

           That’s why I speak out against fuel policies which force many to turn down the heating at a time of cold weather, oppose policies which make it  expensive for people to drive to work or visit friends, and oppose policies which end up with industry choosing to go abroad to burn fuel  where it is cheaper, costing us jobs.

          How can any of this make sense for a small country like the UK, having to compete to earn its living? I am pursuing my questions over how we could keep the coal power stations going for longer whilst we build some better new capacity, and how we can have cheaper energy so we keep more industry here instead of allowing it to go and burn carbon overseas. We need more conventional power stations, an end to the EU’s closure programme whilst we sort ourselves out, more exploration and development of oil and gas ,and more gas storage. I am raising these issues with Ministers.

 

 

       Many people in the UK are alarmed at the rate of increase in state debt. We are worried because we fear that we will be responsible for paying the interest and repaying the capital one day. We do not want the state to 0verextend us, at the very time when the private sector has learned an expensive lesson and is reining back on its debts.

        We see amongst our European neighbours how a state can overextend its own credit with bad results. The people of Greece have elected successive governments that spent and borrowed too much and followed the wrong economic policies. They reached the point where they told the custodians of the state that they did not feel inclined to pay the bills for past debts. As a result to Greek state reneged on a big portion of its debts.

         We now see a similar battle in Cyprus, with the voters telling their representatives there are limits to how much they can put in to pay for past excesses. Elsewhere states renege on their debts in more gentle or devious ways. They cut the value of their currency, reducing the amount of money foreign lenders get back. They inflate their price level, cutting the real value of the money domestic lenders to the state get back. They raise taxes, taking more money off the people who have been lending to the state.

           The message from Greece and Cyprus is a harrowing and sobering one. The truth is that the debts incurred by the state are debts that we all collectively owe. If you stay in the country you pay. When it becomes clear a state has borrowed too much and will find it difficult to borrow more, the political choices all become unpleasant. They revolve around one simple issue – how do you share out the pain of paying. In Cyprus savers with deposits have seen the state simply help itself to some of their savings. In Greece the state has helped itself to an ever bigger proprotion of taxpayers’ incomes. In the UK the state is taxing more and more activities in a bid to stave off a worse financial positon born of the level of spending.

 

 

          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.