John Redwood's Diary – Page 70 – For freedom and prosperity

Anyone submitting a comment to this site is giving their permission for it to be published here along with the name and identifiers they have submitted.

The moderator reserves the sole right to decide whether to publish or not.

Blame the Minister, but sort out the system

April 11, 2024 147 Comments

It is a crucial part of our Parliamentary democracy that we do ultimately hold government Ministers to blame for the many failings of public services and public bodies. We also expect government to intervene or to change the law when the private sector and or too many individuals miscarry.

I still believe in that system. I fully understand why government gets the blame when inflation goes too high, but note that an independent Bank of England is responsible for inflation and brought high inflation on. There are so many areas now where government is blamed but in practice the decisions and budgets rest with independent bodies, or where national and international law and judges prevent Ministers carrying out what they want to do. There are even cases where Ministers change the law but are still thwarted by activist courts.

I will explore how far this removal of power has gone, how many of the independent bodies are behaving badly or incompetently, and how courts and treaties prevent Ministers implementing the public will. As many blame Ministers, Ministers need to take back powers to solve the problems the current system fails to resolve or make worse. The doctrine of independent bodies is doing plenty of damage, from the Post Office to the railways, from Ofwat to the Bank of England. The EHCR stops us controlling our borders and the WHO which had a bad covid pandemic wants more powers to control the NHS.

Bond yields and mortgage rates

April 10, 2024 90 Comments

In July 2022 the UK ten year interest rate was 2%. In early September it was 3% and by the time of the Kwarteng budget on 23rd September it was approaching 4%. It peaked on 9th October at 4.38%. In July 2023 it made another new peak at 4.65% and stayed high until November. It is now just over 4%.

This pattern was similar to the pattern in the USA and the Euro area. The main cause of large rate rises in all three places was the decision of their Central banks to go in for rapid and severe monetary tightening, as they belatedly woke up to the high inflation they had allowed or caused, depending on your view.

It is true that in the period September 26th to September 28th 2022 the UK had a bad sell off in gilts . This was mainly caused by the Liability Driven Investment crisis. The Bank has written of “severe dysfunction in the UK government bond market when distressed forced selling of gilts by liability driven investment funds led to a fire sale dynamic”. The IMF also wrote how “liability driven investment funds were at the centre of the severe stress that emerged in the UK gilt (bond) market”

There are those for political reasons who claim all this was brought on by so called unfunded tax cuts in the mini budget. They overlook the fact that the increases in spending were considerably higher than the tax cuts, forget that the gilt market had fallen a long way that month before the budget because the Bank wanted a big rise in interest rates, and forget the role of LDI investors the following week in driving the market down more. The Chancellor did push the deficit up more than I suggested and could have done more to control spending. Nonetheless the pattern of rate rises and falls show that the main cause of the rate increases was Bank policy, and the main cause of the three day meltdown was LDI troubles as owners of bonds they could not afford had to sell to pay their bills. It was very difficult finding buyers when they knew the Bank was about to sell £80 bn worth of bonds and LDI investors had to sell lots of bonds as well.

Further proof of this is how the Bank turned the gilt market round. By announcing purchases of bonds and suspending the planned sales the Bank brought the ten year rate back down to 3.1% by 20th November 2022.The fact that the following year after a series of tax rises the rate went considerably higher than in September 2022 again underlines tax cuts were not the main issue.

The Bank of England losses stop a growth policy

April 9, 2024 111 Comments

The scale of Bank losses

In the budget figures we were told the Bank of England’s bond buying and selling will end up losing us £102 bn. In its early phases the Bank sent the Treasury profits of £124 bn, so on these OBR estimates there are astonishing total losses coming of £226 bn. As of March 2024 the Treasury had had to pay the Bank £49 bn to cover losses to date, so another £179 bn could become due if the OBR has got a forecast right.

These losses are huge and unacceptable. A substantial portion of the loss is avoidable. The government needs to have urgent discussions with the Bank to slash these costs. Other major Central Banks including the US are not receiving any bail outs from Treasury whilst China and Switzerland did not buy too many bonds in the first place. The ECB which made similar mistakes with bonds to the UK is now containing the losses much better with a different approach.

There are two simple changes needed.

1 Stop selling bonds in the market at low prices. The bonds repay on maturity when the Bank will get more for them than current prices, so stop selling.

Copy the ECB approach to payments of interest to commercial banks on their deposits at the Central Bank . The Bank of England is losing too much on the costs of remunerating the reserves placed with it by the commercial banks compared to the interest it gets on the bonds. As the rate paid to banks is a managed rate fixed by the Central Bank cut the losses.

These changes would lead to a good improvement in the public sector deficit x Bank of England, the measurement they use to control the economy, and to lower mortgage rates.

Bernanke needs to be radical in his review of the Bank of England

April 8, 2024 68 Comments

Ben Bernanke knows a lot about Central banks getting things wrong. On his watch at the Fed he saw inflation hit 5.6% in 2008 before watching it collapse along with important parts of the banking system. He was there for the banking crash and great recession of 2008-10. He pioneered the money printing and bond buying policy that lies behind the wild ride the UK has experienced in inflation and growth 2019-24.

Recommending the same people on the MPC be asked to publish their own differing forecasts will not solve the problem, as there is too much groupthink on the MPC. Telling them to publish a range of scenarios does not help much either, because what we need and want to guide money policy is a reliable base forecast. How else can they set a good interest rate if they have no idea what inflation is going to be. That is why I have set out the need to completely change their forecasting models, to take money and credit seriously, and to recruit different people to provide diversity of thought.

1.The Bank should immediately conduct an internal review into its
models and forecasting to find out why it got inflation so wrong and to
propose amendments that would have produced better outcomes. It should
back test changes to the model to make sure they would result in material
improvements.

2.The Bank should produce an analysis of the role of money and
credit in inflation and discuss how this can be monitored and used in helping
make policy decisions about rates and money creation going forward.

3.The Bank should ensure in its future recruitment to senior roles on
the staff and to external appointments on its committee that it appoints to
obtain a greater diversity of views about economics and inflation. It should
wish to have representatives of the main strands of economic thought on the
important topics around the table.

4.The Bank should reward staff when it hits targets for accuracy of
forecasts and success of out turns to policy decisions.

5.The Bank should reconsider its attitude to Quantitative
tightening. If it is unimportant as an influence on inflation as it says and the
purpose is technical or tidying up it should stop selling bonds and let
maturities gradually reduce its balance sheet. It should consider whether its
bond sales do depress markets in ways which can disrupt them, consider the
flow across to its tasks in maintaining banking sector stability and ask
whether too many bond sales might make a recession more likely. Selling bonds at huge losses and sending the bills to the taxpayer is encouraging recession and preventing a growth policy.

Reduce government interference in energy

April 7, 2024 141 Comments

One subsidy leads to another. One windfall tax soon becomes several permanent tax rises on overtaxed energy. One price distortion tempts Regulators to do more. Instead of pursuing the three aims of security of supply, affordable power, and environmental requirements we end up with energy which is too dear and a growing dependency on imports and the goodwill of foreigners.

The boost to oil and gas prices caused by the decision to get Russian oil and gas out of our supply chains in retaliation for the invasion of Ukraine was used as an opportunity to increase taxes on oil and gas. It was called a windfall tax though the government did not specify what element of the price/profit was windfall, nor did it promise to cancel the tax when oil prices fell back. This then caused super profits for older renewable electricity investments so they too were put under a windfall tax. Subsequently new investment in renewables was exempted . All this reinforced dearer energy, so then the government decided to spend a fortune on subsidies to domestic consumers. The government introduced a price cap on domestic energy bills. As prices fell so the price cap held costs up until the next review point. All these interventions were backed by the Opposition parties who usually wanted them to go further, last longer and tax and subsidise more.

This is a wasteful and worrying model for energy. It has meant higher public sector spending and borrowing. It has deterred investment in new capacity through the higher and unpredictable taxes. It has helped close factories in the UK thanks to high energy prices, increased energy imports, and increased the imports of energy intensive goods.

The same thing is happening with energy using products. It is wrong to tax car producers for selling too many petrol vehicles that people want to buy, and for selling too few battery cars which people do not want to buy. It would be wrong to tax gas boiler manufacturers or to ban their product if people do not want to buy heat pumps. Government did not need to step in to ban blackberries in order to promote smart phones, or to boost computer pads by taxing home desktops. There was no subsidy to promote mobile phones or internet services. Good products sell because people want them.

My Conservative Home article on a vote about net zero

April 6, 2024 197 Comments

Net zero is on the ballot paper. Greens have never wanted a referendum on whether we should make the road to net zero the centrepiece of so many of our policies and life choices. Many think there should be a vote , as this mission has become so dominant, affecting so many areas of government activity and of our daily lives . The country was never allowed a proper conversation about the wisdom of this course of action. All the main parties signed up so there was little debate in Parliament.

Greens will find policies to promote net zero increasingly become election issues despite the apparent party consensus as they weigh on people’s minds and the road gets tougher. In the UK there are two major issues confronting the government which the many pro green Opposition parties wish to shrug off. They are the costs of the transition and the issue of whether the public will buy the goods and services it will take.

The question of money has already come to the front pages. The Labour plans were said to need an extra £28bn over the next five years. Labour has had to withdraw this proposal as it does not fit in with the numbers supplied by the OBR about what is affordable. Labour will want to find ways to increase the contribution of private capital, and will be looking to see if there other taxes it can raise to pay the bills. One way or another it has to accept the fact that wanting to get the power sector to net zero by 2030, five years ahead of the government, will require a lot of extra spending which will need subsidy and incentives. I doubt it can be done, but it certainly cannot and will not be done by private money alone. Closing down our fleet of gas fired power stations early means writing them off and substituting dearer ways of generating power when full costs are taken into account. There would need to be government subsidies for the electricity storage and transition costs. I doubt we could build enough new capacity in time and couple renewables with all the ways you would need to keep the lights on when there is no wind or sun.

UK energy customers already carry a net zero burden on their energy bills. Lower costs of buying electricity have been overridden to provide boosts to the use of renewables and nuclear in past bidding rounds. Subsidies have been built into some net zero decisions that are carried as a general charge on bills. A mesh of controlled prices, windfall taxes and preferred fuel choices has kept prices higher recently, with some subsidies providing some offset. Voters do not warm to higher fuel prices, and the government stepped in with large subsidies when the Ukraine war caused a spike in fossil fuel costs with the withdrawal of Russian oil and gas from the market.

Clearly scrapping all fossil fuel power stations and putting in many new renewable generators is costly. There will also need to be substantial storage capacity , with investment in some mixture of batteries, hydrogen production from renewable energy and pump storage to able to cope with interruptible sources of electricity. In the meantime as government thinks about how and who pays for all that extra cost there needs to be back up power stations capable of being switched on when the wind dies and the sun sets.

Today there is considerable opposition to siting new wind farms near settlements, to putting pylons across landscapes, to drilling for onshore oil and gas and to digging up roads and pavements to install larger capacity cables. These can become issues in local elections in particular. If the costs of electricity storage and carbon capture become too high then the cost of energy will be back on the agenda as a running sore for the government that imposed the costs.

The question of consumer acceptance needs more debate than the greens allow. The truth is hardly anyone wants to buy a heat pump to rip out their gas boiler. Most people are put off by the large installation cost. They do not want the double disruption of putting in more insulation followed by heat pump works. They find the overall costs far too high, several times the cost of a new gas boiler. They are concerned that in an older house it may never be possible to get a heat pump to provide higher temperatures given heat loss, and are worried that running costs will still be high as electricity is a much dearer fuel than gas per unit of energy. It is true the heat pump cuts the need for energy in use, but that can be offset by the higher costs of the energy.

Battery electric cars are a minority choice for individual customers. Many are put off by the high prices, by the difficulty in finding recharging places on longer journeys, by range issues and by the time it takes to recharge. Some of these problems will be resolved as and when more fast chargers are put in. Many people are waiting for the roll out of hydrogen as a fuel for trucks, and of synthetic fuel for planes. As this happens why not use those fuels to power a conventional internal combustion engined car or van? Why not keep your home gas boiler in the expectation that clean gases will be added to the gas mix as more are produced.?

The green revolution wants to change the way we heat our homes, the kind of transport we use, the products we buy from industry and the diets we eat. To do this there needs to be far more consumer enthusiasm than there is today. Government and business are working together on this strategy. They need to spend more time working out which new products people will want to own and will be affordable. We still have no idea of what combination of hydrogen based or synthetic fuel based transport and heating we will have and how much will require improved battery vehicles and heat pumps. There is a danger of backing too many competing technologies and failing to get any of them to the scale where they will work better and be more affordable.

Bite sized books have just published John’s updated short book “The $275 trillion Green revolution. Will consumers buy it? ” available through Amazon.

Get a grip on nationalised industry costs

April 5, 2024 123 Comments

When we had many nationalised industries they dominated public accounts and caused some of the overspending and over borrowing that damaged the Labour government of 1974-9. Nationalised industries sacked a lot of employees, over charged customers and often lost taxpayers huge sums. Rail, coal, steel were in painful decline. Telecoms fell well behind technically with shortages of investment.

Today the public accounts are being damaged again by two nationalised industries, rail and the Post Office, and by the colossal losses of the Bank of England. Since 2022 the Bank has demanded £50 bn from taxpayers to pay its bills. Network Rail has just got approval for £30 bn of taxpayer cash for the next five years. The Post Office has lost £1400 m in recent years and now expects taxpayers to pay up for all the repayments and compensation they owe the sub postmasters.

I have often reported on the needless damage to the accounts being perpetrated by the Bank. The Fed does not send its losses to the US Treasury for reimbursement. The ECB does not sell its bonds at huge losses in the markets. Only The Bank of England does this.

Network Rail plans to rely on taxpayer grant for almost two thirds of its cash needs. Only 4% will come from revenues of its commercial, property and freight interests. It has fabulous land and buildings, with key sites in the centres of our cities and many towns . It fails to develop those and to harness private capital to make more stations good locations to visit with retail and services. It fails to develop land adjacent to stations and rail yards for commercial purposes.

Nationalised HS 2 was a spectacular failure at building the original northern rail scheme to something like budget and timetable . It is ending up building us a ridiculously costly additional London to Birmingham line when improved signalling and by pass track would have been a much cheaper answer to any capacity issues.

My Daily Telegraph article on the green revolution as I sent them

April 4, 2024 149 Comments

The Telegraph amended this and added a headline without my consent.

The vast ambition of the net zero policies envisages most people switching their heating to electricity, their travel to bicycles and electric cars, and their diets to vegetarian options. It certainly needs the wholesale conversion of electricity generation from coal,oil and gas to renewables, and a solution to what to do when the sun does not shine and the wind does not blow. We need to ask are consumers ready for changes of this magnitude?

So far governments have concentrated on doing what should be the easier bits of the change over. They have considerable influence and control over energy markets and have increased their interventions in them. They have ordered more renewables and pressed for closures of coal based generation. They have used subsidies, tax breaks, windfall taxes, regulations, managed prices and bans to tip electricity generation more strongly towards wind and solar power away from fossil fuel. They have got support or acquiescence from the industry to this pathway. Industry actively promotes renewable power as a good. At home it is forced to roll out smart meters to an increasingly sceptical group of consumers who have resisted them so far. It has come forward with many new windfarms and solar arrays.

Even this transition in the UK has hit some buffers. More renewables means more grid to handle the great variability of output and to transfer the power from offshore and from the north to onshore and in the south where most of the customers are. The industry is behind on increasing grid capacity, and plans for it are delayed by planning processes that reveal the opposition to pylons in local landscapes. It is all more cost for consumers and taxpayers.

The digital revolution sweeps on because people like its products and services. We have seen a near universal adoption of mobile phones. The majority have signed up readily to the internet, have liked downloading entertainment of their choice when they want it, have turned to social media and on line meetings to keep in touch with friends and family, have undertaken many a google search, let their photos and memos be stored on an Amazon web server and usually use Microsoft software. A handful of leading US companies have swept the globe with their new products and services without government subsidy, tax break or exhortation.

So far the green revolution has not fired the same enthusiasms. Battery electric cars are still a hard sell. Heat pumps with a £7500 subsidy do not fly off the shelves. Whilst many people do say global warming is a problem and something should be done about it, few think it sufficient of a problem that they need to change their travel, heating and diet. There are determined minorities on both sides of the argument. One group say it is essential people are made to change to stop the rise in temperatures. They want tougher tax rises, more restrictions on drivers and bans on fossil fuels. One group says it is all nonsense, with a variable climate affected by many things in addition to human carbon dioxide. They do not want the government interfering and think adaptation much cheaper than prevention if temperatures do rise. The majority in the middle would like policy to be gently pointing in a less carbon direction, but not in a way which would worsen their living standards and put up their costs.

The all electric battery car is mainly bought by fleet buyers who benefit from a tax break and have to show their shareholders they are taking net zero seriously. Hertz car rentals has recently announced it bought too many electric cars and is unable to rent them all out, so it is selling some of its fleet. In the UK most individual car buyers think battery cars too dear, worry about their range and how you would be able to recharge them. Some think it would be better to develop synthetic fuels which can already be produced in small quantities. These work in conventional engines and be supplied through existing filling stations.

The heat pump is an even more difficult sell. If like many you have an older house you first need to spend a lot with disruptive works to properly insulate the whole building. You then face an installation and supply cost of around £15,000 before subsidy with more works. You may need to put in bigger pipes and radiators to get it hot enough. Whilst the heat pump does cut the amount of energy needed to heat the home, given the much higher cost of electricity per unit of energy the running costs can still come out higher than a gas boiler.

Some think it better to keep a modern gas boiler and change the gas fuel used to fire it. Increasing volumes of hydrogen or its derivatives made from renewable electricity and water could be fed into the gas supply as the power becomes available. There is little point people buying a heat pump system all the time we depend on gas fired power stations for the extra demand. Why burn the gas in a remote power station, losing energy in transmission, when you could burn it at home?

More people are turning to vegetarian diets but no political party is going to ban meat or impose a special meat tax anytime soon. When the Dutch tried to cut back animal numbers on local farms as part of a net zero strategy there was a political earthquake with a new Farmers party and the Wilders party helping evict the government that did it. The best way to wean people off methane intensive animal products is by producing better alternatives.

The world cannot get to net zero without major changes of consumer behaviour. The digital revolution shows people are willing to make big changes in the way they work, enjoy entertainment and talk to each other if you produce great new products and services. The Green revolution designed by global civil servants and forced upon us by governments still has to find the iconic products that would fire the imaginations of families. People do not want a landscape covered in pylons, a car that cannot make it easily to the next working charging point and a heating system that is a lot dearer than the one they have got. They do not want to be stuck in more traffic jams as highways authorities make it ever more difficult to get about in a van or car. More do now worry about what happens to everything electric when the wind does not blow and when evening darkness has closed down the solar.

Two modern arguments against nationalisation

April 3, 2024 118 Comments

The two best arguments against nationalisation today are the Post Office and the nationalised rail companies Network Rail and HS 2.

Both of these have lost taxpayers a fortune. Both have failed to deliver good service and to achieve the aims set for them by governments.

The Post Office under Labour and Lib Dem Ministers bungled putting in an expensive new computer system. It then blamed its sub postmasters demanding money from them they did not owe and putting many into court and prison. Under Conservative Ministers since 2015 the Post Office has delayed and diluted efforts to correct the record and compensate those falsely accused.

In recent years the Post Office has racked up losses of £1400 million plunging the balance sheet into the red . The Post Office is only allowed to trade by its auditors with a Treasury guarantee to pay all the continuing losses. Without a taxpayer guarantee the PO is now bankrupt.

HS2 Ltd has presided over a massive escalation of costs to build a railway line, and allowed long delays in building the track and ordering the trains. So bad has it been it has resulted in deleting important parts of the original plan whilst we await a new track between Birmingham and London for a train which was meant to improve connections for the north. If they had stuck to the original budget and timetable we would at least have got a new railway to the north.

Network Rail has presided over colossal losses. It regularly shuts sections of railway down for maintenance at holiday periods when more people might need a train. They do not resurface the main runways at Heathrow over a bank holiday. It is often the reason for train delays and cancellations with points and signals failures, and with flooded and undermined track.

Network Rail has been slow to introduce digital signalling that would allow more trains to run safely on the same track, knowing exactly where all the other trains are. Its vast rambling property estate is poorly kept, and underdeveloped with often a negative response to ideas to develop station property better.

All 3 of these nationalised companies have paid large salaries and bonuses to senior executives regardless of the losses and poor performance. There have been many changes of Minister and 3 different governing party governments ( Lab/Coalition/Conservative) presiding over these companies. How can you argue this has been a good way to run things? Don’t private sector companies like Amazon and Microsoft do things better?

Sorting out water

April 2, 2024 145 Comments

There are 3 ways forward for a company like Thames Water. There can be a deal between Regulator and the current shareholders and management agreeing an affordable investment programme and realistic customer charges for the task. There could be a move to force a sale to new shareholders by undermining the current company, with a possible period of management by a government Administrator. There could be nationalisation.

Nationalisation is a particularly bad idea. Existing shareholders would need to be compensated for the enforced sale of their shares. State confiscation of the assets of the UK Universities Pension Scheme and the Ontario Municipal Pension Scheme would be contentious. To do so could put off the many investors and supporters of private finance activities that the UK relies on. University teachers in the UK might demand compensation for their pension scheme.

After deciding what to pay for the assets the state would then need to find additional money to increase the investment spend. It would all add up to a very large bill for taxpayers. In the past nationalised industries have also been good at running up large losses taxpayers have to pay. Current state enterprises, the Post Office and HS 2 have shown just how huge the losses and cost overruns can be.

Tipping a water company into Administration also comes with considerable costs as well as reputational damage to the UK as a good place to invest. The special Administration of an electricity company was costly for taxpayers.

To those who think the company should be bankrupted and the debts written off and not met, I remind you that the government and Labour rely heavily in their forward plans on harnessing large sums of private capital to provide the extra homes, energy capacity, broadband and the rest we need. If the country got a reputation for stealing assets off investors and undermining businesses by unrealistic price controls and regulations that would get a lot dearer and more difficult to pull off.

The best way forward is a negotiated settlement between the company and the Regulator. As most want faster progress with expanding capacity of our dirty water pipes there needs to be an increase in spend and in customer contribution. If we want more and better sewers then either customers or taxpayers have to pay more. As it is the same people paying VAT, Income tax and water bills I prefer it to be on water bills. There needs to be a clear link and financial discipline on water companies between revenue and renewal expenditure.

There is the added complication that Thames Water is owned by a holding company that now says it has run out of money. Uk taxpayers and water customers should not bail that company out. It is not itself a highly regulated water monopoly serving UK customers. If they need to tell the shareholders they need to get more money from them or undermine their investment further then that is a matter for them which should not affect the UK state.