It had to happen sometime. Someone in the magic circle had to ask the obvious question. Why is the government solemnly paying the Bank of England interest on the government debt it has bought up? After all, the government on behalf of taxpayers, owns the Bank of England.

If I owned 100% of a private bank, and that bank bought up my mortgage from a commercial bank, I could ask my private bank to simply cancel the mortgage. I would, of course, have to tell the taxman about it! The government does not even have to do that, when it finds itself in an analogous position. The government also writes the tax law.

When asked to explain it on the BBC, Mr Peston told us that there could be a problem with the Bank’s balance sheet if the Treasury simply cancelled its debt. He said they would have to convert the outstanding gilts to irredeemables, loans with no repayment date, with zero interest. He clearly does not understand accounting or finance. Such loans would have zero value, so they would not solve the balance sheet problem Mr Peston imagines exists. Even if the zero interest bond theoretically would be repaid in many years time it would have a much reduced value from the bonds the Bank currently owns.
The government’s debts are an asset for the Bank, so anything which diminishes its value sounds like bad news.

Fortunately, Mr Peston, the Bank has bought the gilts on the back of a Treasury loan, with an idemnity from the Treasury. The Bank and the Treasury could agree to cancel the gilts (Bank assets) and cancel the Tresury loan (Bank liability), leaving the Bank’s balance sheet unscathed by the activity. The Bank would owe the Treasury the profits on the gilts it has bought, which indemnity could also be cancelled leaving the Bank all square.

And should they? That is altogether a more difficult question. It would be good, at a stroke, to cut the size of the official (gilt edged) debt by almost 40%, and cut the interest burden. It would be bad to let the markets think that the UK now just intended to print as much money as it felt like spending in the public sector over and above tax revenues. That way is the road to Weimar and Zimbabwe type inflation. If they do end up cancelling this debt, they will need to show greater resolve and success in cutting the deficit and controlling future spending, not less. It would have to be a one off, coupled with obvious commitment and achievement in returning to honest spending and honest money. Confidence is a precious flower, easily killed if the authorities look and act irresponsibly.

The award of Nobel Peace Prize to the EU is a badly judged piece of European politics. Many of us western Europeans have worked hard for peace and democracy over the last half century, whether our countries were fully part, reluctantly part or no part of the EU. Norway and Switzerland have been no more warlike than EU members.

The peace has been kept in western Europe since 1945 because all major countries became peace loving democracies with no territorial ambitions against each other. This was reinforced by NATO, which kept our peace with the communist bloc to the east. If any institution deserved the peace prize in Europe it was NATO.

Meanwhile the modern EU is causing dissension between peoples and countries in Europe. Just look at the scenes confronting Mrs Merkel in Greece recently. The EU’s involvement in the Balkans was also contentious when that region was rent by wars.

Last year at conference Mr Cameron spoke about the UK offering leadership in fighting poverty, and leadership in fighting tyranny. This year he led with more domestic ambitions. His main overseas comment was that “by the end of 2014 all UK combat operations in Afghanistan will have come to an end”. Some of us welcome this change of emphasis, but want a speedier exit.

He gave a good speech about the challenge of getting the UK back to work and spreading propsperity much more widely. He seeks welfare reform, so that it is always worthwhile working. The system should give incentives to those who try, rather than rewards to those who do not, whilst looking after those who cannot work. He seeks school reform, so many more can have the advantage of a great education. And he seeks enterprise reform, so many more can and will set up businesss, and many more can help their business grow and create the orders and jobs we need. He wants to spread privilege, and is on the side of those who want to be better off.

When reviewing the achievements of the government he mentioned the veto on the Fiscal Treaty, the deportation of Abu Hamza, the Olympics and the Council Tax freeze.

All of that was well received by the audience. The question we need to ask is what policies will follow from this concentration on helping the strivers and emphasising the need to improve the UK’s ability to compete in the world?

I did not expect there to be policy initiatives in the Prime Minister’s speech. It was best that he set out the big arguments, and gave a sense of direction. We need to look elsewhere to see if there is going to be back up to the speech, if the whole government will now be fired up to deliver the vision.

The Chancellor made two announcements in his speech. His decision to set out a “generous new tax regime for shale gas” is welcome. It shows that he is now exercised by the dear energy and the looming energy gap this country faces. We will find out if he can change enough in UK energy policy to deliver the larger quantities of cheaper energy industry – and householders – need or whether the government remains locked in by renewable and emission control directives to dear and scarce energy. It think it is going to take more than a welcome tax break for shale, though that does help.I suspect we have to tell the EU we will not be implementing all their directives by 2015, if we want to keep the lights on at a price we can afford.

The Chancellor’s decision to grant a CGT tax break on shares an employee holds in a company, offered in return for waiving certain employment rights is more contentious. I doubt it will make a lot of difference. People investing in the company they work for can already secure CGT advantages. A general cut in CGT rate would be a much better stimulus to investment and enterprise, and would probably collect more revenue at the same time.

The Prime Minister clearly thinks the Gove reforms of education will be sufficient in themselves to spread the opportunity of an education as good as Eton to many more pupils. I fear that is optimistic. We have been discussing recently on this site other options to speed the progress of better education. It would be a good idea to allow for profit companies to operate, and to permit selection by academic ability as well as selection by the other currently approved criteria.

A lot rests on the huge welfare reform underway. I think the government needs to do more immediately to tackle the question of eligibility. We have talked here about Treasure Island syndrome, with many people able to come from overseas to enjoy welfare benefits and public services without contributing. Getting to grips with that would help create a greater sense of fairness, cut the bills and show all legally settled people here that the government is serious about welfare being for those in need, not a way of life. UK Ministers have sought to limit the right of EU migrants to come here to receive benefits, and now face a legal challenge from the EU over this fundamental point.

Several of you wrote in expressing dismay at the proposed tie up between BAe and the Franco German civil aviation company. I did not write about it, as I assumed it would be an impossible deal to execute. The documentation was very voluminous, so I did not bother to read it. The politics were always likely to bring it down, so there was no need to analyse the business, economic and strategic issues.

Not so long ago George Osborne rallied the nation with a ringing cry for a new industrial revival. He summonsed the march of the makers. It was a bold and enticing vision.

Yesterday David Cameron told the country it is engaged in a mammoth struggle to become more competitive and successful in world markets. The background to his remarks was a year of falling industrial output. The most recent figures for exports showed a £9.8bn deficit for August on trade in goods. The quarterly goods exports figures were 3.1% down on the previous quarter.

The government rightly points out that the Eurozone crisis is depressing EU markets more than official forecasters expected. The official forecasters as so often have been far too optimistic and too neglectful about the obvious tensions and problems with the Euro scheme throughout its life. However, the worrying feature of the recent export statistics is exports outside the EU have been falling more rapidly than exports within the EU. The UK in recent months has been going backwards when it comes to selling to fast growing markets, as well as understandably losing sales in the Euro area.

The government needs to revisit its policies for encouraging more manufacture. There are three areas above the rest that need immediate action.

The first is finance. There is still a shortage of bank finance for business, despite all the varied schemes. The government does have to create some new banks out of the embers of RBS and get them into the marketplace as soon as possible. We need more, better financed banks, with capacity to lend.

The second is energy. The UK along with the EU has opted for dear energy. The UK has gold plated the dear energy policies of the EU, and is busily shutting down its coal plants that currently supply substantial amounts of electricity. The US and the emerging market manufacturers have a huge competitive advantage from cheaper energy. The UK needs to wake up and make price central to its energy policy, allowing a new dash for gas.

The third is talent. It will take time for educational reforms to work. These may yield more science and engineering graduates. In the meantime the government as chief educator needs to look at ways at accelerating the retraining of people with scientific backgrounds who would be interested in a career in industry, and to look at shorter courses for talented people who may need some basic training in engineering to be able to operate well in a manufacturing environment.

The decisions taken on corporation tax are helpful, those on CGT and Income Tax are unhelpful. The government has promised to cut the costs of regulation. If done wisely this could be very helpful. We do not want unsafe factories or low quality goods, but we could do with faster planning decisions and less box ticking.

I was asked to talk about this question at a meeting at Conference.

Growth comes from people wishing to do new things, to buy new goods and services, to renovate and improve their homes, to transform their lives and their environments in ways they like and can afford.
All too often Councils are the official bodies who are out to stop them doing this, or out to tax and charge them for daring to try.

Most local businesses depend on the van. Plumbers and loft insulators, new goods deliverers and conservatory builders come by van. Most of us do not live next to the station. We rely on the flexible and ubiquitous van, which may not always be white, to turn up with the goods or the service. Professional and on line services often depend on the car to get the providers to their place of work or to the customer’s home if needed.

Many Councils see the van and the car as an opportunity to raise tax revenues, to charge them and to restrict their use. If Councils really wanted to help the local economy they would see that they need to do much more to allow reasonable vehicle access to potential customers, and to allow potential customers access to shops and other centres of trade. They could:

1. Allocate land for sufficient parking near town centres and residential developments, and provide it free or at low cost.
2.Ensure that all new developments have ample parking at or near people’s homes, to allow trade access as well as taking the residents’ cars off the main highway.
3.Work to create less congestion in existing developments. This includes the need for safer junctions, with sufficient space at the junction to keep pedestrians away from traffic and to separate right turning traffic from the rest.
4.Allowing the delivery of items to the door as long as the road is not blocked for traffic by the drop off
5. Reviewing all their local roads with a view to improving the flow of traffic
6 Making selective junction improvements, increasing the number of bridging points over local railway lines and rivers whicb usually create the main congestion.

Councils also have an important role in promoting or limiting enterprise when it comes to planning. Again many Councils see this as an opportunity to tax and charge people more. Of course the Council has a planning role to prevent inappropriate devlopment which would annoy neighbours or damage the amenity and environment of the locality, but at times and in some places this is extended to a general opposition to change. Councils could

1. Lower their fees for seeking planning permission and Building Regulation approval
2.Speed the decision making process up
3. Require objectors to demonstrate that a proposal would have an adverse impact like more noise or the loss of light
4. Be more relaxed about a change of use where there are not reasonable grounds for objection
5. Ensuring all main settlements have land demarked for extra provision of space in all the main categories
6. Encouraging local plans to come forward for more starter units for businesses

A number of Councils and professional bodies involved with planning and town centres were represented at the meeting. There was a surprising amount of agreement with the proposition that parking and access were vital issues. Some cited examples of better and cheaper parking policies which had helped revive shopping centres.

The government had a good proposal to cut its administrative overhead by 30% over the 5 years. The latest figures show they seem to have done this already.

Certainly the Health,transport and Communities departments report a fall of around 30% in their overhead costs. The overall figures are greatly helped by large declines at Treasury and Work and pensions. A footnote tells us that some of their activity has been reclassified from overhead to service expenditure, so we cannot see how well they – or the overall government- has done. The largest government overheads are obviously at DWP and Treasury, where they have armies of people collecting the money in and giving it out again.

Within the list the 261% increase last year compared to 2009-10 at Culture Media and Sport is understandable for the Olympics. Presumably this will collapse next year. The increase of 51% at Justice is less understandable. The small falls in the non English departments, at the Cabinet Office , Education,. Business and defence are also important to question.

It is also interesting to note that expenditure on total pay has risen in cash terms since 2009-10, despite these cuts. It appears that the governmetn has spent a lot on redundancies, but has also put salaries up and has recruited some replacements, so the overall savings have been less than simply following a natural wastage policy.

Today I will be exploring the role of grammars in our state educational system, with Graham Brady and Janet Daley.

The hatred of academic selection at 11 is an anomaly in our system of education. All political parties and most in the educational establishment agree with rigorous academic selection at 18, to decide who will go to university, and to determine who will go to the elite universities. The places in the best institutions go to the students who do best at A level and in academic interview.

All parties agree that from 16 onwards students should have to take an array of competitive examinations. Those seeking vocational qualifications also have to achieve various standards in GCSE qualifiers, and in the subsequent vocational tests and exams. This means that from 16 onwards all parties and the educational establishment have to accept the failure of some as well as encouraging success for many.

When it comes to promoting high quality sporting achievement, dancing, art, singing, and other musical activities we base our system from an early age on competition and special training or instruction for those who achieve more and show a greater willingness to practice and learn. The UK’s all conquering Olympians were given special coaches, special training regimes and very special treatment. In return they had to work extremely hard and give their utmost to the task. They had to reach high levels of achievement to stay on the programmes. If someone wants to be a concert pianist, a premier league footballer, an England cricketer, an opera singer or a ballerina, they have to go through arduous training based on selection on merit.

We allow children with rich parents to go to good schools,giving them charitable status. We allow those independent schools to select their pupils as they wish. Some of these schools give great academic coaching and expect high standards. The grammars used to give an equivalent specialised academic opportunity to children without rich parents. Now that only happens in a handful of counties like Kent, Buckingham and parts of Berkshire.

The result is more independent school pupils proportionately get into the elite universities. Instead of trying to dumb down requirments for university, we need to foster a cadre of schools specialising in teaching the most committed students who have an academic aptitude and determination. It is the best way to social mobility into academic life and the leading knowledge based professions.

Tomorrow at conference I will be part of a panel discussing how public spending could make a bigger contribution to cutting the deficit. I will have very limited time to tackle such a big and important topic. Let me sketch a bit of the background in this post, in advance.

The first thing I have urged the government to do for the last two and half years is to avoid large external commitments at a time when we are fully stretched at home. For that reason I voted against the £20 billion of extra money being made available to the IMF, primarily because I fear that money will go to the unworthy cause of trying to avoid changing the Euro scheme to let it work for those countries who can live with it. I voted against the £3.2 billion special loan to Ireland and against the UK £8bn contribution to the European Financial Stability Mechanism for the same reasons.

The second thing I have done is urged the government to transform RBS. RBS is too large for the UK state to back comfortably. It has been loss making and failing to deliver enough support for the UK economy. I have tried to get the government to speed its break up, sale of assets, reduction of taxpayer risk, and creation of new working banks out of its assets and liabilities. Getting the taxpayer out of majority ownership of a £1.5 trillion bank would be the single most important step it could take to cut potential risks and losses for taxpayers, and to improve the UK state balance sheet rapidly.

The third thing I have done is to set out case after case where the Uk government could spend less without damaging services or entitlements. There is the issue of the large derivative losses at Network Rail; the £800 million research programme of DFID; the £500 m overseas aid to nuclear weapons powers; the £1.3 bn of aid channeled through the EU that is not universally well spent; the large operating losses and inefficiencies of state owned Network Rail; the high level of subsidies to inefficient and expensive ways of generating energy; the persistence of high overheads at departments like DFID and the Energy department and many others;the high costs of legal aid owing to long winded and repetitious court processes for terrorist extradition, for example.

The fourth thing I have argued is that we spend far too much on UK membership of the EU. I have been pressing the governemnt to use its veto over the forthcoming 2014-2020 financial settlement. I have supported colleagues seeking a major cut in expensive and badly targetted EU regional assistance; pressed for a big reform of the CAP to cut its costs to taxpayers and food buyers alike; sought a general reduction in what the EU does in the UK and how much it spends.

The fifth thing I have highlighted is “soft touch UK”. With others I have asked the government to charge overseas users of the NHS for their treatment. I have proposed charges on foreign haulage firms using our roads. I have supported moves to curtail illegal immigration, and to tighten eligibility rules for benefits so they go to legally settled people.

PS I Am pleased to hear the Prime Minister is willing to veto an unacceptable EU budget settlement for 2014-2020, but disappointed that the government finds a “real terms freeze”acceptable when we need deep cuts to the EU outgoings.

I will be speaking at meetings at the Conservative conference on economic growth, grammar schools, the EU and public spending. They are all on Monday 8 October, which is Economy day at conference. The details for those interested are:

10.30 am “Local Growth” Hall 8B at the ICC (inside security) organised by Westminster City Council

12.00 noon “Are grammar schools a key to restarting socila mobility?” Conservative Home Marquee (inside security)

14.00 “Leaving the EU?” Bruges Group Main lecture theatre of Birmingham and Midland Institute Margaret Street (outside security)

16.30 “Cutting the deficit” Conservative Policy Forum Hall 1 ICC (inside security, party members only)