The government’s planned deficit reduction strategy rested on a large increase in tax revenue. The June 2010 budget set out to increase annual tax revenue by £177bn in 2014-15 compared to 2009-10. The Coalition VAT increase added to the outgoing Labour government Income Tax and National Insurance increases were expected to do the job, aided by good economic growth over the ensuing years. This would allow the Coalition to raise current spending by £90 billion a year in cash terms over the period, and cut the deficit substantially.

            Mr Osborne’s third budget, two years into the Coalition government, aims to raise tax revenue by £154 billion a year in 2014-15 compared to 2009-10, £23 billion less than the original proposals.  A bit of this fall is for the good reason that the second and third  budgets have brought some Income Tax cuts to standard rate taxpayers through the further increase in the threshold. The rest of the shortfall is the result of two other trends.

 The first is slower growth, meaning less revenue from a less buoyant economy.  The second reason is the falls in revenue brought on by higher tax rates.  The latest Treasury forecast now assumes that self assessment income tax will fall by 10% this year compared to last year, despite the higher inflation and growth which would normally increase it. The higher 50% rate is having an adverse impact. The Treasury also now forecasts a fall of almost 10% in the Capital Gains Tax receipts next year, as we feel the full effects of the higher 28% rate, despite the good gains on London property and many business assets since the market bottom in 2009.

                 The government’s study of the 50% rate argues that the impact of the 50% tax could be negative, but their best estimate is that dropping the rate to 45% would lose the Treasury just £100 million in tax income. They rightly hedge their figures around with many uncertainties.  They also have errors in their report – for example Chart 5.3 tells us that only 250 people in the UK had incomes of over £150,000 in  2010-11, when it must have been many times that. They show that the incomes of people on £150,000 a year or more fell by 25% in 2010-11, which implies a very large loss of revenue. As the official forecast is for a 10% fall in self assessment revenue we must assume that the fall comes from this sharp drop in top incomes, offset by some gains on lower incomes.

                 They show that the mean highest rate for the G7, the G20 and the EU 27 is below 40%. The UK was tax competitive when the government first cut it to 40%, but has long since been overtaken by the rest in the race to attract talent and enterprise.

                  This budget does not forecast any further economic weakness, and estimates that total borrowing over the five years will come out a bit lower than the high figures of the Autumn Statement 2011. It still leaves the UK state adding £528 billion to net borrowing over the planned five years of this Parliament despite the credit of £28 billion of Royal Mail pension assets. The Chancellor has adjusted the increase in spending down a little, from an extra £90billion in Year 5 to an extra £86 billion. I think we should ignore Table 2.3 of the Red Book where it says total public spending will be just £733 million, as I think they should have put “£ billion” rather than “£ million” at the top of the table.

                 The immediate politics of the budget are likely to revolve around the treatment of pensioner incomes and the reductions in tax credits, which offset gains being made for some through raising the tax threshold. Assessment of the longer term budget judgement will rest heavily on whether the various measures proposed to boost growth do do just that.  We will return to that story another day.

 This is another  leaked  letter from Dame Lucy Doolittle, Director of the unit for co-ordinating cross cutting initiatives and partnerships to Dr Roy Spendlove, Miscellaneous Projects.

          Dear Roy,

                          I am writing to ask you to take up the task of developing an infrastructure programme. I know you were very concerned when the previous government decided to cut capital expenditure. You argued at the time that it would remove jobs from the construction industry and harm prospects of recovery. I understand you were disappointed when the Coalition government was only prepared to reinstate a small proportion of the cuts in their first budget plans in the summer of 2010.

                            I have been involved in a series of high level cross departmental discussions including  the Treasury to   try to reinstate some of the lost projects. Ministers have come to see the importance of rail, road, energy and water investment. They have even been prepared to reconsider their objections to more London airport capacity. They have now asked us to come up with imaginative ways of financing these projects, so they can have the advantage of the stimulus to activity, without the spending scoring against the public debt as traditionally defined.

                           I appreciate your expertise in this area, as I remember you did a lot of work for the previous government  in the areas of PFI and PPP. This time round we should also bring into consideration the new more flexible relationships with a couple of banks that have large state shareholdings. We can consider what use can be made of the government’s current ability to borrow at cheap rates, thanks to quantitative easing.  There are new precedents in the form of Credit Easing, Quantitative Easing and the new mortgage scheme. The latest £20 billion  National Loan Guarantee Scheme, for example, does not raise an additional contingent liability on the Treasury, as it is scored under the old Bank of England asset purchase facility. We have been able to argue that it is merely a transfer from the Bank’s ring fenced asset purchases with Treasury guarantee to a direct Treasury balance sheet guarantee. The full inclusion of the Royal Mail Pension fund allows us to credit the assets in a helpful way for the current deficit, while allowing long term amortisation of the liability.

                           I would also like you to widen the work to consider the role and future of quantitaive easing. Whilst the Bank has the lead on this, it does require consent from the Treasury. Given our co-ordinating role in this important infrastructure work, I think we need to be ready to argue the case about the future size of the programme and the uses it can be put to. The Bank’s use is narrow, confined almost wholly to buying government debt in the secondary market. Whilst this has the welcome effect of keeping government borrowing rates down, it does not necessarily help the rest of the economy as  much as it might. I think we need a way of having more control over the  spending of  the money created. You appreciate the sensitivities in how this can be described and presented.

                     We see the European Central Bank has approached it differently and lends three year money to commercial banks, who in turn can then lend to governments or high quality companies. Maybe we need to suggest that the Bank of England should widen out its activities, as it could make our task much easier in finding the money for these programmes.

Yours ever

Lucy

         The last Budget book in March 2011 told us that the Coalition government planned to increase current public spending by 16% over the five years to 2014-15. It forecast  an increase of 11% in total public spending in cash terms, as it has left quite a few of Labour’s cuts in capital spending in place. It estimated it would increase tax revenue by 36%, bringing the deficit down by 70% as a result. If the government enforces tough public pay freezes and improves public sector buying as promised, these cashspending  figures translate into little change in real terms.

          The Autumn Statement cut the forecast revenue increases, as  the government decided to turn more pessimistic about the likely growth rate of the economy.  The March 2011 forecast of total extra borrowing of £485 billion over the five years soared to a forecast £563 billion as a result.

              This 2012 Budget is unlikely to have to report more bad news about less revenue or more involuntary spending. It is likely to worry about growth, as the growth rate in the economy is central to achieving the large forecast increase in tax revenues the strategy rests on.  The government is likely to concentrate on two major areas to promote growth.

              The first si they will seek a private finance route to reinstate the cuts in public capital spending they inherited – or alternative projects to take up the slack in construction. We have seen today the outlines of a scheme to build more roads. Mr Cameron’s speech has also promised decisions on airport, energy  and water capacity. We know they are working on away to tap pension fund money to finance better infrastructure.

                The second is they will seek new ways round the finance blockage caused by the tougher regulation of banks. The banks are struggling to meet much more stringent capital requirements. That means they lend less, or fail to expand their lending, as they seek to improve the ratio of capital to loans.  The government is likely to try to find a way round this regulatory  constriction. They have announced a mortgage loan extension scheme, and are now poised to announce help for lending to small and medium sized enterprises.

                  It might be cheaper and easier simply to relax the capital requirements of the main banks. After all, we are now all meant to believe in counter cyclical regulation. That means allowing lower ratios of capital to loans when the economy is in or recently out of recession, and then demanding higher amounts of capital when the economy is in  danger of overheating.

                    The budget also has to resolve how to tax the rich successfully. The Treasury now forecasts a fall in CGT revenue next year by some  £500 million as the higher rate makes its full impact. Income Tax revenue was poor this January, with self assessment revenue down in cash terms.  The past moves down in the top rate from 83% to 60% and then to 40% all boosted top rate taxpayer revenues massively. Will the Chancellor go for more revenue, or play to  the gallery that likes soak the rich and successful taxes even if they do  bring in less?  To me the art of taxing the rich is to tax them in a way which makes them stay and pay.

          I will return to this topic when we hear more of the government’s plans. Suffice it to say the governemnt’s scheme is not my scheme. That may come as a a great relief to some of you, who say you prefer government monopoly rationing and provision of roads, paid for by high taxes on motorists.   My scheme began with the abolition of Vehicle Excise Duty, and replaced that with tolls that leave average motorway users better off. The government’s scheme keeps VED, and allows private companies to share that revenue for the purpose of maintaining and improving the highway. The government rules out tolls on exisiting capacity, but would use them for new highway. We will need to explore the details and seek to influence the options, as I understand the aim is to commission work on a scheme, not to go straight to a worked out proposal.

         I see my question in Parliament recently has also been raised by week-end commentators. Ministers in this Coalition government are finding on many occasions that they cannot make the decisions they wish to make, owing to EU Directives and regulations, Treaty agreements, the European Court of Human Rights or some other quango that can override or set the policy.

        On Friday night we held the Annual General meeting of the Wokingham Conservative Association. Both Dan Hannan MEP and I spoke to the meeting. In his remarks Dan reminded us of the way there have been a couple of quiet “coups” in the EU, with the substitution of unelected officials in government for the politicans the countries originally elected. He reminded us there is not a single elected person in the Italian government. As he pointed out, Signor Monti is both Prime Minister and Finance Minister, a new definition of the full Monty.  I explained the growing frustrations of many Conservative MPs in Parliament, who now want this government to get powers back from the EU, to withdraw from the extremes of the ECHR, and to assert  Parliamentary democracy again.

           In responses to my assertion yesterday that England is more Eurosceptic than Scotland or Wales, several of you have asked me to supply evidence, as you do not agree. I judge voters by their actions, more than by their words. That’s the way many of you assess politicians.  If you look at the last General Election, you see the following pattern:

Scotland    Conservative  16.7%,  UKIP 0.7%

Wales   Conservative 26.1%    UKIP 2.4%

England   Conservative 39.6%    UKIP  3.5%

               Practically all the other votes in Scotland and Wales went to parties that proudly support the EU as it is, and welcome further Treaties to strengthen the law making and powers of the EU. The Conservative party campaigned on a platform of repatriating powers from the EU, and UKIP campaigned to leave the EU altogether.

                It is quite clear from these results that there is a very strong majority in Scotland and Wales, in the ballot box, for parties that favour federalism. In England there is a stronger wish to vote for moderate Euroscepticism come election time.

               UKIP recognises this by running its better candidates in areas where there are already good Europsceptic Conservative MPs, rather than trying to do something  useful by seeking to knock out federlaist MPs elsewhere. Mr Farage clearly thought Buckingham was more Europsceptic than  anywhere in Scotland in the last election, though he managed to come behind a strong advocate of more EU, as well as well behind John Bercow. He did not run against one of the damagingly federalist well know figures like Mr Brown or Mr Darling, despite the fact they had pushed three federalist Treaties through the Commons against Conservative votes and voices.

              It is high time those who say they want to change the UK’s relationship with the EU  recognise that so far UKIP  is just a wrecking movement that tries to get Eurosceptic Conservatives thrown out of Parliament to be replaced by Federalist Labour or Lib Dems, instead of making common cause and grasping that it is a growing group of Conservative Eurosceptic MPs who make the arguments and cast the votes in favour of more UK democracy.  Anyone who thinks Scotland and Wales are Eurosceptic based on the last election must have misread the results.

       I am regularly asked now for my opinion on Scottish independence. I was asked it again on Thursday at the EU conference I attended. My reply is that we should instead be discussing the question of England.

           I pointed out that the polling which shows the UK as hostile to EU government in so many areas of our lives would doubtless show those feelings are str0nger in England alone. The EU draws more support from Scotland and Wales than it does from England.

                Nationalists in those countries enjoy using the EU against England. They see that the EU’s continued insouciance to England, refusing it any recognition, is part of the process of weakening and undermining  the Westminster government they dislike. It all helps to  antagonise the England they wish to leave in a way which might help the change they want. One of the great ironies of the Scottish “independence” movement is it is not truly an independence movement at all. It is a dependence movement, wishing to shift Scotland to Brussels control directly. It is an anti English movement more than it is an independence movement. In bizarre opposition to all the rest of his feelings, Mr Salmond even wants to keep Scotland in  the pound under the control of the Bank of England!

           I explained to the audience that there are English Eurosceptics now who not only want out of the EU, but want an independent England. To them the ideal outcome would be England leaving the Union of the UK, and leaving the EU at the same time. Scotland and the rest could keep the EU membership as a leaving present or a poison pill, depending on how you look at it. England would then be free to spend her own taxes, make her own laws, and run her own affairs as she used to before the 1707 union and the 1972 union.

             England’s representatives have accepted that Scottish withdrawal from the UK is a matter for Scotland and not for the rest of us. I am happy with that, but only on the understanding that should Scotland decide to stay there must be a new deal for England. If Scotland seeks devo max, and the UK government is prepared to offer it as the price of keeping Scotland in, we must insist on devo max for England as well.

            As an English MP I want my country to be self governing, if Scotland splits away. I want the UK  to have a referendum on its relationship with the EU. If the UK splits, I would hope both Scotland and  the rest would have to renegotiate with the EU. That would  give England  our opportunity to say we want trade and friendship agreements, not membership of the emerging supertstate. We could put behidn us many of the chains that currently ensnare us from Brussels. English taxpayers may want save payments  to the EU as well as to Scotland.

            If, as I expect, Scotland recoils from leaving the UK England must insist on her own devo max. We also need to insist on a new relationship with the EU. The EU fits ill with English nationalism, which is the new force in UK politics which the SNP are deliberately fostering. Defenders of the EU are now defenders of the UK, which is causing new problems for the defence of the UK union in England. Defenders of the EU see that the splitting of the UK will cause a crisis or natural change in our relationship with the EU that they do not want.

        Yesterday I spent the morning being interviewed by Danny Finklestein at an event at One Birdcage Walk discussing the economic future and the future of Wall Street and London as world markets. I joined a panel in the afternoon at the FT/You Gov conference on the future of the EU.

           We had before us the polling from You Gov which shows that a large majority of UK voters now wish to see a return of powers from the EU in all the major areas. It shows majority opinion is against any further integration of the UK with the EU, and in favour of a new looser relationship of the kind I have been arguing for. I was asked by Irish and German representatives why I did not argue for the UK playing a more central role in the EU, and introducing our famous  democracy into it. Even strong protagonists of EU integration are sensing the absence of proper democratic accountability is a growing threat to the fabric of the Union.

             I explained that most UK people had no wish to be drawn into a deeper EU Union, and most of us wished to have many powers back so we govern ourselves again. I explained the irony in their remarks. The very cause of damage to our democracy, the EU and its growing power, is now urging us to sacrifice even more of our remaining self government in order to introduce democracy to the EU! I can’t see how that would work. If you want a democracy first find a demos. Who is the demos in the EU? Haven’t they noticed the sharp differences of opinion between countries, and growing tensions between countries that the Euro is fostering?

            During the course of the exchanges I explained that the big majority of the UK electorate is now Eurosceptic. Some wish to leave the EU immediately. Others wish to negotiate a new relationship, taking powers back, but retaining common trading arrangements and the capacity for some joint action where it is volunteered by all parties. Very few wish to join the Euro.  All understand that joining the Euro is the big step, the one which requires a country to join a political union to back up the ailing currency.

              We were asked to forecast what might happen. I would be interested to hear your views on what might happen, rather than on what you would like to happen.

1. How many members of the Euro  will there be in 2020?

2. What relationship will the UK have with the EU in 2020?

3. Will the EU move to an elected President?

4. Those who want the Uk simply to exit might like to tell us how they think this could come about, given the present parties and voting patterns.

       Yesterday the Backbench Business Committee showed its worth once again by putting on two good debates. In the first the Commons agreed unanimously that it did not like the idea of charging taxpayers £15 to go up Big Ben.  Many of us feel that free access to the Palace of Westminster is part of our democracy. Big Ben is a symbol around the world of the Mother of Parliaments. British taxpayers deserve free access to it along with the other main public parts of the Palace. They pay enough for it through taxes.

      The second was more fundamental. The House wants a better deal from the EU over our fishing grounds. The disgrace of the Common Fisheries Policy has united most MPs, whether from coastal towns or inland locations, whether from Conservative or Labour, in wanting a new approach. We arel united in condemning the absurd discard policy, where fihermen have to throw dead fish back into the sea where they have been caught against quota rules. Yesterday there was universal agreement that the UK should have much more control over its own fishing grounds.

         My view is we need to cease to regard our fishing ground as a common resource. I do not just want some greater power to manage the grounds. I want the full power back to decide on who has access and on what terms. One of my colleagues, arguing for subsidiarity rather than for freedom in these matters, said that the fish in British waters did not swim around with a UK flag on them. I responded that nor do they swim around with the twelve stars of Europe on their backs.

          Fishing is a classic example of a common policy organised by the EU which has conspired to do harm to the fishermen, to the fish buying public and to the fish. It has been bad for conservation and bad for business.  It should be well up the list of powers we want back. It is one of the best examples for those making the case that the UK would be better off out. The Commons motion did not go as far as I would have liked over fish, but it did remind the government that even this Parliament is in a mood for more UK self determination. The latest polling shows that by a large margin UK voters want the UK Parliament rather than Brussels to make important decisions over our borders, our defences, our economy – and our fish. It is now up to the government to see what power they can bring back. They have aroused expectations. They will need to be firm of purpose in negotiating a new approach.

          Amidst the basket ball games and trip on Airforce One, the Prime Minister has plenty of time to talk to the President about the US/UK involvement in Afghanistan and the wider Middle East.

           It is a sobering week to do so. We still have in our minds the tragic deaths of six UK soldiers when their armoured vehicle was blown up by a planted bomb. We have been shocked by the mass murders of sixteen Afghan civilians in their own homes from the gun of an American soldier. Yesterday in Parliament the Deputy Prime Minister and the Deputy Labour Leader made longer than usual tributes to our forces, and expressed our common grief at the needless Afghan loss of life.

          Both leaders have long acknowledged that we need to take our forces off active duty in Afghanistan, prior to withdrawal of many of them. The policy has been for many months that we will help train more local  soldiers and police preparatory to taking a less active role and then returning home. I have just tabled some questions to ask how long it takes to train Afghan personnel. When we can get into a position where the Afghan trainees led by Afghans that are experienced and trained might undertake their own patrols and policing?

             We could move more rapdily to a position where out troops stayed in protected barracks and were on call only if some special equipment or expertise was needed by the Afghan patrols. We could plan a faster withdrawal from  Afghanistan as a means of accelerating progress in putting Afghans in charge. There is nothing like the experience of doing it yourself to complete the training.

             The period of prolonged withdrawal can be the most dangerous for our troops. For that reason if no other we should wish to curtail the period of risk. Risks are increased by incidents like the burning of the Koran and the unprovoked  murder of  civilians. All those Afghans who want foreigners off their soil or at least want armed foreigners off their streets just have more reasons to support their cause. Of course none of this was intended. Of course the overwhelming majority of foreign troops are well disciplined and generous with their skills, willing to run risks for the sake of the greater good. However, one random bad act can give propaganda victory  to those who want an early departure of overseas soldiers.

           Let us hope our leaders use their time to establish a new common position that speeds up what Mr Camron calls the “end game”. While they are about it, they might pause to reflect on how it might be better to avoid a further military intervention in the region for a bit. The USA now has access to vast shale gas reserves, which move it closer to future energy self sufficiency. The UK too could reach self sufficiency if it wished. That would be a peraceful goal which helped the world economy and took away some of the reason for such tensions over the oil rich lands of the Middle East.

It is fitting that the English word for a government loan, a bond, also has an alternative meaning as a kind of enslavement.

If the government does borrow money for a hundred years at say a 3.5% interest rate, it brings home the slavery of a nation in debt. For every £1000 million borrowed, taxpayers will over the years have to pay £3500 million in interest, before finally stumping up the £1000 million of capital for repayment.

Rational people save up their money before entering a major spending commitment, or seek to bring their spending into line with their income. If governments were prepared to get their accounts into balance it would spare taxpayers this growing mountain of debt, and the huge interest bill that goes with it.