The government’s economic plan rightly said it intended to cut the share of the economy taken by the public sector, and boost the share of manufacturing and production. The aim is to reverse the dramatic move in the other direction under Labour. In their last three full calendar years they presided over more than a 10% fall in production industries output, and a 3.7% increase in public sector real output.

            In 2010 and 2011 production industries edged ahead by 0.7% whilst public sector output rose by a further 2.2%. These figures of course include four months of Labour and 20 months of the Coalition.

             The overall figures for the period 2007-2011 inclusive show just how far the imbalance has gone. Over that time period public sector output rose by 6% whilst production industry output fell by 10.5%. It just shows how much now has to be done to rebalance as the government intends.

              Putting this right cannot be done by monetary policy alone. Industry needs cheap energy in abundance. The UK is taxing and testing high energy using industries  by its dear energy policies, partly required by its consent to EU carbon dioxide policies.

               It requires a well trained and flexible workforce. Working needs to be more rewarding than being unemployed.

              It requires good transport links.

              It takes the patient building of supply chains, with the capability to produce more components locally to cut costs and logistic delays.

               The UK is having some success with increasing its motor industry output. It has good positions in areas like pharmaceuticals, food manufacturing  and aerospace engineering.

                The UK needs a period when it avoids major companies getting into difficulties. BP was badly hit by the drilling disaster. RBS and Lloyds HBOS were brought down in ways we have often described on this site. This week GlaxoSK paid a $3 billion fine to draw a line under mistakes they have made in selling and marketing. It is a good job that Parliament and press have not launched a bank style witch hunt against this large pharmaceutical company at the same time as the attack on Barclays.  We need more corporate successes so we can earn our living in an increasingly competitive world.

             The government has much more to do to create the right climate for industrial led growth. The UK’s industrial base is now a small proportion of the total economy, so it will need to grow quickly to drag the rest of the economy into good growth. If the financial service and banking sector contracts further, industry will need to grow faster again to prevent another rise in the proportion of public sector activity.

 

Dear DG,

Congratulations on your appointment. You have a great job and an important task. Many of us are proud of the best of the BBC, and agree that much of its programming produces good quality entertainment and interesting debate.  Some of your critics come from both the political “right” and the political ” left”, claiming that the BBC has institutional bias against their parties.

I do not believe that BBC broadcasters overall have a systematic bias pro Labour or anti Conservative. I have heard good journalists give tough interviews to Labour Ministers, just as they rightly give tough interviews to Conservative Ministers. During the Labour years the BBC did cover the scandals and problems that afflicted Labour, as well as Conservatives.  As the BBC often says to a complainant, the fact that both sides have causes to complain proves they are getting something right.

 

I do, however, think the BBC has an institutional bias when it comes to general views of the world. For too long the BBC has given much too much favourable airtime to those who think the EU, the Euro and all that goes with it is a good idea. Those of us who criticised the project were, until recently, given less time, interrupted more, and often introduced in a way designed to make us appear wrong or worse. Recent interviews have attempted to balance it a bit more on the issue of the Euro, given the daily news of its problems. There is still bias when it comes to examining the debate about long term membership of the EU. The BBC still comes over as believing leaving the EU is an extreme or impractical option. BBC interviewers seem to be soundbite trained to assume we could not trade with the EU if we left it, and to assume that 3 million jobs would disappear overnight if we quit!

The same problem dogs the Corporation’s treatment of climate change theory. The BBC takes the view that the “science is settled”. Any intelligent person should know that by definition the science is never settled. Newtonian physics was a gerat breakthrough, which settled the view of the heavens. In the twentieth century its was challenged and improved. Many intelligent people have many different reaons for disagreeing with  pure climate change theory and more importantly with the policy conclusions that flow from it in the debate. The BBC does all too little to give these dissenting voices decent airtime,to explore their disagreements and to allow viewers and listeners to make up their own minds. If the conventional theory is as all conquering as the BBC says, it should be able to handle grown up examination of its alleged shortcomings from its critics. Tackling fuel poverty and promoting more industry in the UK, two popular causes even with the BBC, are difficult to combine with carbon puritanism.

There is above all at the BBC an assumption that state spending is good and more state spending is better. Rarely does the BBC give proper airtime to the case for greater freedom and lower taxes. So many interviews are arranged to regret “the cuts” and to find governmental answers to social and family problems. Even “Thought for the day”, the so called religious slot, is usally taken up with more political commentary of a particular kind, where the department, policy or Minister being criticised does not get to answer back.

 

Yours sincerely

 

John Redwood

Today I will be voting against an eighteen months Judge led enquiry into banks.

We have had a wide ranging enquiry into the industry, its structure and attitudes led by an eminent independent economist and former competition regulator, Sir John Vickers.

We are having a full scale FSA enquiry into wrong doing at various banks.

There are potential Serious Fraud office enquiries into established wrongdoing following FSA investigation.

The banks need fixing now, not in two years time.

The government should know by now what needs doing. It is poised to legislate. A Judge led enquiry would cause delay in fixing the problems.

 

                       On tuesday night I spoke at a Centre for Policy Studies event to remember Milton Friedman’s contribution to economics 100 years from his birth. Deepak Lal gave a forensic talk about the main contributions of Milton Friedman to the development of economic thought.  Niall Ferguson powerfully and elegantly set Friedman in historical context, and explained the importance of his wider work popularising free enterprise friendly economics.

                       I drew on Friedman’s work in his Monetary History of the United States where he stressed the need to keep money growth at a sufficient level to prevent depression. His commentary on the monetary errors of the 1930s was seminal when he wrote it, and is influencing Mr Bernanke at the Fed as he fights the latest  danger of recession in America.

                       I pointed out that the Coalition government offered a Plan A for recovery based on a tight fiscal policy, bringing the deficit down by reducing spending, and a loose monetary policy. This was the formula which has fuelled some successful past recoveries. We have discussed many times before the fiscal stance, where so far spending has gone up in real terms and new borrowing remains at high though reduced  levels. I also pointed out that money growth is far from easy or loose.

               Over the last year the growth of M4 lending has been around 1%. Broad money growth has also been sluggish. The large amounts of created money through the quantitative easing programmes has stuck within the banking and state credit system. Tough banking controls allied to some weak bank balance sheets has prevented this money being released into the private sector to power a faster private sector led recovery.

               The figures beneath show the fast growth of QE money and the inability of the banks to use or pass this on:

M4 lending   annualised growth           Q2    2011           +0.1%

                                                                            Q3 2011              +1.2%

                                                                           Q4 2011              +1.6%

                                                                           Q1 2012             +1.2%

                                                                            April/May         +1.5%

 

Reserve balances               June 2012 (12 months annualised)                 +77%

Notes and Coin                     June 2012  (12 months annualised)                +5.9%

          Plan A, tight fiscal and loose monetary policy for UK recovery was a good one. The problem is we are not getting either a  tight fiscal or loose money stance.

            For those interested, the three speeches are available on video through a link to the Centre for Policy Studies website.

 

          There is little discussion or analysis of what is happening at RBS amongst the political classes. This is surprising, as the size of RBS still swamps the public accounts. What RBS does is of vital importance to the future of the UK economy. Good assest management by RBS is crucial to avoid more taxpayer losses, and to get taxpayer cash back.

           I thought it might be topical to look a little at recent RBS performance, After all, the bank has been in the news recently for its computer failures, and will doubtless be in the news again  soon for the results of the enquiry into whether it had a role in the LIBOR fixing.

              The stated aims of the bank are sensible.  It aims to “serve customers well”. It aims to “restore RBS to a sustainable and conservative risk profile”. It aims to “rebuild sustainable value for all shareholders”.  I have no great quibble with those. If asked, I would say the aims should be to pay the taxpayers back for the money they have put at risk, and to make a contribution to the economic recovery the UK needs. Any large UK bank also needs such a recovery  if it is to prosper in the UK.

                Customers probably feel a bit bruised by their bank after the recent problems with giving people their balances or letting them draw out their money, thanks to computer problems. I cannot recall a major bank getting into such a difficult situation before. The Group has apologised and recognised they let customers down. Doubtless more needs to be done to make sure it cannot recur, and to ensure that customers who lost out are properly compensated.

                   The balance sheet of the Group has been reduced substantially from its peak, and strengthened through government support and other actions. Some assets have been sold to comply with competition requirements. However, as at December 31 2011 the total balance sheet had gone up over the previous year to £1.5 trillion. This included an increase of £100 billion in derivatives held during 2011, taking them up to £530 billion. In the first quarter of 2012 they shrank the balance sheet again, to £1.4 trillion, cutting the derivatives assets by £77 billion. There are also substantial derivatives on the liability side. It is important these are reasonably balanced, reducing the risk of these large positions.

                      The bank showed total loans of £516 billion to customers at the end of 2011, compared to £555 billion a year earlier. This has fallen further in 2012. There have, of course,  been asset disposals.

                       In 2010 the Group lost £1666 million. In 2011 the Group lost £1969 million. In the first quarter of 2012 the Group lost  £1404 million. Administrative expenses rose in 2011 compared to 2010.

                        The remuneration of directors remains of interest to the taxpayer funding this bank.  The directors are well paid. They also enjoy  an annual incentive scheme with “a normal maximum incentive opportunity of 200% of salary (with an exceptional maximum of 250% of salary”.) They also may gain awards to a Long Term Incentive Plan  with “a normal maximum of 400% of salary”. They receive an allowance in lieu of pension contributions. The CEO has said he is not taking his annual incentive payments this year.

Evidence abounds that free enterprise societies are more prosperous and people in them enjoy more freedom than state planned economies. Capitalism should be popular. It brings us jobs, new technologies, great entertainment, good shops.

Today the mood is sour. Good political speeches these days have to include a denunciation of “banking culture” and a demand for more regulation with stronger criminal sanctions. The latest revelations from Barclays do not make good reading, and are likely to be followed by similar bad news from some other leading banks.

The answer to this is simple. It has never been an attractive feature of free enterprise that some organisations can become so large and powerful they are able to rig, damage, or interfere with the market. Monopolies and cartels are against the law – unless they are in the state sector of course. Most people agree that cartels and monopolies, price rigging and fixing, are wrong and should be prevented. I have always supported a strong competition law, designed to prevent just such accumulations of power.

That is why I opposed the Competition authorities allowing RBS to take on ABN Amro, and opposed Lloyds taking over HBOS. That is why I have consistently favoured splitting up large banks that have grown too big and have then needed public money to prop them up. It would have been much better to sell off the bits that worked in 2008 when large banks fell badly, and to save the taxpayer most of the grief by making bondholders as well as shareholders take the strain of their failed banking models.

So what should be done today about the latest banking scandals? They should be properly investigated and appropriate action taken to deal with wrong doing. Where the government is a leading shareholder it must be active in ensuring proper standards of conduct in its banks, and make sure the people leading those banks create the right climate within them. In the case of private sector banks it is the job of the shareholders to appoint and support management that provide the right leadership. Barclays is now doing this by seeking a new CEO.

Above all, this latest revelation about practices in the last decade should move the government to want to break up RBS. The bank is far too large. We need more and new competitors on the High Street capable of giving us a good banking service. We need banks where High Street loan and deposit business is important to them, and where the reward levels of the bankers make it worthwhile to do it well at a cost we can afford.

Mr Cameron’s article yesterday in the Sunday Telegraph did represent an important advance in government thinking. He now agrees with those of us who say we need a new relationship with the EU. He agrees it is not just a case of saying “No” to future transfers of power, but getting powers back that have already been ceded.

I also agree with him that holding an In/Out referendum soon would be bad news if the In campaign won. The Uk would then have little bargaining power to get a better relationship, and would have lost the chance to leave the EU if things got worse. Mr Cameron also made it clear that in the unlikely event of an In/Out referendum soon taking place, Ministers in the Coalition would side with Labour, the Lib Dems, the CBI and probably the TUC in an attempt to make it a re-run of the 1975 referendum to secure a Yes vote. Many Conservative members and MPs would of course be campaigning for a No vote if the only thing on offer was In on the current terms or Out.

The government needs to add to its new realisation that the UK needs a different relationship with the EU to defining that relationship and getting on with negotiating it. MPs have done a lot of work in the last two years listing all the many powers the EU has taken, appraising the poor performance resulting from many EU policies, and setting out what the UK needs to get back to become once again an independent country. The Foriegn Office is aware of all this work. It is high time Mr Hague set out in a speech what a new relationship based on trade and friendship rather than common governemnt would look like.

The government is wrong to say we cannot make a move now owing to the problems of the Euro zone. We need to make the move now for just that reason. The UK needs to be free of any financial liability from the Euro troubles, and free of the extra government the EU will now seek to impose to try to “save” the Euro. As the EU will need UK consent to their pushing ahead for a more comprehensive union, the UK is well placed to say as they want more EU power over their lives we intend to have less. We should travel in the opposite direction.

The governemnt should see what it can negotiate and then put it to the vote. The referendum question should simply be “Do you want to stay in the EU based on the new deal on offer?” The fact that it would be put to a vote would put some pressure on the rest of the EU to offer us a relationship we can accept. The fear of loss of a very lucrative export market for France and Germany, and the worry that we might no longer make any financial contributions to the EU if we decide to leave, should persuade them to offer us something sensible. The choice anyway will be ours, and many UK people are fed up with the EU so would like to be out altogether.

I have been sent a copy of Dame Lucy Doolittle’s latest letter to Dr Roy Spendlove:

from The Director for co-ordinating cross cutting initiatives and partnerships
Whitehall
SW1

Dear Roy,

I am pleased to report that we seem to have weathered the storm over public spending cuts as well as could be expected. The campaign to say “too far too fast” has been too political for my taste, but I fear privately that it seems to have gained some traction. Ministers have to accept they need to be careful from here, given the tough criticisms they are experiencing from the Opposition. As we move into the second half of this Parliament I woudl expect greater realism about spending totals to prevail. The original figures for 2013-15 always looked too tight to me.

Ministers do not seem to be concerned by the paradox of our situation. Total public spending is up by 7.8% this May compared with a year ago, but there have been cuts as most acknowledge. It just goes to show how expensive it is now to provide good government, and how many demands there are on Ministerial priorities and budgets. It is good that public spending has avoided the worst of the cuts as originally vaunted in the media, as public spending has contributed to cushioning the fall in total output at a difficult time in the world economy. I see that real public spending overall is up, but as you know it does not feel like that from where we are sitting.

I give you this background as Ministers do now need more help from your Miscellaneous Projects Division. They are naturally concerned about the double dip and the Euro crisis in the background dragging down the economy. They therefore would appreciate our help in identifying and pursuing capital projects that could provide some counter cyclical stimulus to help lift the economy. They would prefer private finance, but I have explained that these are difficult times and we may need some pump priming public sector money. I think it would be best if you concentrated first on the desirable projects, leaving open the method of financing. We can sort out those details later, once Ministers have indicated their preferences on the type and scale of projects.

We still have some difficult distribution issues for money between departments as a result of Ministerial priorities. Overseas Aid is relatively well off, and European programmes seem to do quite well. At the other end of the spectrum defence and local government seem to be in a tight squeeze. We need to reflect the bduget priorities, though of course we can suggest some relaxation of the squeeze in areas where there are good shovel ready projects. I suspect Ministers are going to be pragmatic about the spending totals given the need for more activity. It looks as if the Bank will oblige by keeping government borrowing rates very low, so there is an incentive to get on and borrow now whilst we can lock in to such favourable rates.

I do hope you can theme some of these projects as green ones, as this will help us meet Ministerial aspirations and EU targets in this important area.

Mr Cameron’s speech this week on welfare reform was a thoughful and important contribution to the debate about the future direction of welfare policy.

He acknowledges that welfare accounts for almost £1 in every £3 the government spends. He rightly wishes to be generous to those in need through disability or ill fortune. He also wishes to promote work as the best kind of welfare for most people of working age. He identifies many of the perverse incentives in the system.

There are 400,000 more people in work than in 2010 when the government was formed. This is good progress, against a difficult economic backdrop. The private sector has comfortably created many more jobs than the public sector has shed, despite all the dire warnings to the contrary when critics saw the forecasts for job reductions by government. Mr Duncan Smith’s programmes to help people back into work are having some favourable impacts. The numbers for both employment and retail sales also make one wonder how accurate the GDP figures are, as they tell a different story.

Mr Cameron says he wants to carry on with his welfare reforms to show he is on the side of “those who work hard and do the right thing” He wishes to end features of the system which trap people in poverty and “encourage irresponsibility”.

He asks if it is a good idea that last autumn out of work benefits were increased by 5.2% in line with the RPI, when wages rose much less. This is a good question. If you wish to make it more worthwhile to work, raising benefits by much more than wage rises sets you back in your task.

He asks if it is right that Housing Benefit can lead to young people in benefit dependent households leaving home to set up their own benefit dependent household, when the children of working people have to stay living at their parent’s home for longer until they can afford a place of their own.

He asks if people who have been on out of work benefits for years should have to do some work in return for their benefit. He asks if there should be a higher rate of benefit for people out of work for a short period, reducing if they are not successful in returning to the workforce. He rules out the Clinton approach of removing benefits altogether from people out of work for a long time.

Looking at the size of the current welfare bill and the substantial increases recently reported, there is need for more reform. Welfare benefits are not high for most people who need to rely on them. There are too many people on them. The government needs to do more to encourage people off benefits. It needs to do more to limit eligibility in future for potential new claimants where Mr Cameron has identified unfairness in the system between benefit claimants and the rest of us. Some of this work needs to be done now, not later.

Germany has compromised. The bail out funds can be used to refinance banks directly, and to buy state bonds in the second hand markets after all. Although Mrs Merkel says she is against Eurobonds, using the joint credit rating to raise money for any part of the Euro union, she has in effect now agreed to this by the back door.

The problem with the new scheme is that they have to borrow the money to put into the bail out “funds”. If they borrow it on the credit rating of the bail out fund they have a kind of Eurobond. They are going to need to get on with issuing large quantities of debt to build up this fund. If they are going to beef up the funds with larger member state contributions, then Italy and Spain have to borrow more to help augment the fund, as they are around 30% of the total when it comes to credit status and contributions. We now need to watch their progress financing the funds.