The rift between the US and the UK over Iraq is growing. American sources are now saying on the record that Britain’s ill disguised retreat from Basra is destablising the south at a time when the US wants to reinforce positions throughout the country.

As readers of this blog will know, I have always worried about revealing your intention to retreat too long before you execute the action, as it does weaken the overall position and expose your own forces. I also fear that the US will lose its own determination to try to impose order on Iraq. The US needs to understand that many of the problems in Iraq come from the warring factions and the inability of the elected government to create a political settlement in favour of united Iraq. Without a political consensus in favour of a united democratic Iraq the foreign forces trying to keep order become part of the problem.

George Bush claims that retreat now would create a Viet Nam. It is difficult to see that the US can commit sufficient forces to subdue the violence and rebellion throughout the country, and difficult to see how you can establish an independent vibrant democracy if it depends entirely on the heavy use of foreign force to sustain the elected government. It was a brave decision to throw the Viet Nam analogy back at his critics, but it will leave many people fearing that the final retreat from Baghdad will be like the retreat from Saigon

It is fascinating to see how far the news has now travelled that Ireland’s low business and capital tax regime has made Ireland much richer and more successful than Scotland or the UK. When I started this argument I did not expect the SNP to pile in behind the idea, let alone the new Leader for Labour in Scotland.

Some of us don’t just want lower business and capital taxes for Scotland – we want them for England too. The pressure must be on Mr Brown, who could bring them about any time he likes for both Scotland and England. If he doesn’t, tax will be one of the pressures pulling the Uk apart.

The Head of the Fed is at the moment the most important and powerful person for the world economy.

He came to office after the much liked Alan Greenspan. Greenspan had kept world markets and the world economy marching ahead, by slashing interest rates every time there was a financial squall, to prevent the losses getting out of hand and to prevent the real economy suffering too much. He was able to do this thanks to the arrival of super competitive China and India as large scale suppliers, keeping prices down however much the west borrowed.

His successor was well aware that this method of managing had created huge mountains of debt that could become unstable if interest rates went up too much. He also knew that all the time markets expected interest rate cuts everytime financial institutions got into difficulties, there would be little discipline in lending and no proper appreciation of risk by bankers and funds.
He decided that interest rates needed to be raised to give these financial insttiutions a warning that they needed to become more prudent in their lending. He was also aware that the China effect on prices might not last for ever. Chinese demand became so large it started to drive up oil and commodity prices, shipping rates and some Chinese salaries and wages, whilst at home domestic wages and prices could rise on the back of ever ready credit.

His early interest rate rises caused no great problems. No doubt Mr Bernanke was well aware that there would be lags, but because he also knew the debt problem was so large he kept hiking rates. By this summer the combined impact of much higher rates and the delayed response to earlier rate rises induced the sharp sell offs we have been witnessing in the last two months.

Now we learn that Mr. B has hinted that he will do whatever it takes to "stabilise" markets. That would mean we are back to the Greenspan approach, cutting rates to stop too many people defaulting and to keep the debt machine well oiled. Watch this space: that would change things quite a lot.

I hear that Australian politics is just as trivial as UK politics. At a time of financial crisis, with western forces still dug in in Afghanistan and Iraq, and worries about terrorism and migration, the media are going to town because the Leader of the Opposition once visited a strip club and the Treasurer once said he wanted the top job.

I understand that the Leader of the Opposition is a family values Christian, so it is a newsworthy lapse or inconsistency. The real issue for him is will it make any difference to what he does in power were he to win? I doubt if one night drunk in New York means he feels he has to give tax breaks to strippers to grow more night clubs in Sydney, or ditch his Christian beliefs. Christianity is based on the doctrine of the fall of man, and on the inevitability that men and women will sin.

The Treasurer has been well known to want the Prime Minister’s job for many years. Again it is newsworthy that he once said so, and threatened to damage the Howard premiership because he wanted it so badly. The truth is he has not destroyed the Howard premiership, and has been prepared to work with the PM to produce a successful run so far.

The most important issue for both men that the press should concentrate on is how will they respond to the world financial crisis? Governments have had good times owing to the very long period of very low interest rates, the credit mountain that generated, and the hard work of the Chinese and Indians who kept prices down so people could borrow and spend all that money without pushing prices up. In a period of some correction of too much debt and higher interest rates governments and rich countries generally are going to have work harder and smarter to maintain and advance their living standards. It is a time for people who know how to get value for every dollar and pound spent by the public sector, and for parties that can free business to compete.

I was invited onto Hard Talk. I was told I would have 24 minutes to set out some of the views from the Economic Policy Review. It sounded like a long period of TV when perhaps we could get beyond the soundbites and the elementary misunderstandings onto some of the meat, so I accepted. I was quite happy to have "tough" questions – ideas should be tested out, and TV should not be too bland.

I told the researcher in response to preparatory questions that I supported David Cameron, and gave background to the wide ranging proposals on managing the economy, transport, universities, vocational training, energy, pensions, government efficiency,deregulation and taxation.

The interviewer was an intelligent man in suit and tie. It looked promising.

He then spent the entire interview telling me that George Osborne and I thoroughly disagree about taxation, based on one selective quote from George. I had to spend the interview repeating endlessly that both George and I think we can learn from the Irish example, both of us believe you can pay for tax cuts from the proceeds of growth, and both of us think economic stability matters. We both know that economies with lower tax rates on enterprise have more jobs, better paid jobs, and more money to spend on public services.

It completely wasted the time of the interview, and I felt it was very boring. If anyone wants to know what is in the Report, then forget that interview, because there was no single question on the Report. The BBC have still run virtually nothing on the transport, energy,skills, or education plans, and have completely ignored the critique of Brown’s economic policy framework and the very topical comments on the financial crisis.

Once the pre record was complete and we had shaken hands for the cameras, the interviewer told me the camera had been switched off. He then told me I had "played with a straighter bat than he had expected" and invited me to tell him what I really thought. I explained again that I do think economic stability matters, that there should be no upfront unfunded tax cuts,and that sharing the proceeds of growth will allow lower tax rates and a more successful economy.

I do not know whether I was more bemused by the BBC’s assumption that I was a lair, or that I am stupid!

Labour constantly cry that Tories will cut schools and hospitals to pay for tax cuts. It is a Labour lie.

Throughout the period of Conservative government, every year Labour claimed the government was cutting health and education to pay for the tax cuts.
So what did happen?

In 1978-9 the state spent ??26.9 bn on health. By 1996-7 this had grown to ??49 billion (all figures in real terms)
In 1978-9 the state spent ??26.6bn on education.By 1996-7 this had increased to ??35 billion (all in real terms)

Overall spending had increased by 40% in real terms. In cash terms it had risen from ??73 bn to ??314 bn!

And income tax had been cut from 83% to 40% top rate, bringing in much more revenue from the rich.

Strange that, when Labour claimed we were cutting spending every year.

As the debt mountain starts to subside under the impact of the higher interest rates from the Central banks we need to remember the huge yen carry trade.
All the time the dollar remained strong against the yen and dollar assets went up it made sense to many people to borrow yen at rock bottom rates, and buy dollar assets at better rates. Once the yen starts to rise against the dollar, if people think it will rise further, that game is over. People rush for cover to avoid currency losses.
The Chinese markets are so far little affected by all of this, owing to the strong official influence over their markets, and the huge surpluses they are generating day by day. At some point there has to be a slowdown in US demand for Chinese goods brought about by some combination of weaker dollar and less spending power in the US.
There is some buying now of high quality dollar bonds, as investors switch out of some of their lower quality instruments.

We learn today that research confirms the obvious – if you concentrate Accident and Emergency centres at a few big hospitals it takes much longer for casualties to get there. This means that instead of getting their crucial first treatment at a bigger and better trauma centre, they have to receive it in a travelling ambulance, which is more dangerous.

There is another reason to be worried. Almost 6000 people died in 2005 in UK NHS hospitals where a hospital acquired infection was mentioned on their death certificate. Concentrating so much at a few large hospitals may mean sending accident victims to infection centres, where virulent strands of c dif and MRSA are proving difficult to remove. This too should be considered before the government blunders into an other round of smaller local hospital closures.

The UK troops are now camped near Basra airport, dealing with relentless fire. It is only a matter of time before the UK government ends their misery and allows them to come home. Some in the UK military think the continued presence of British troops in Basra is making the situation worse.

The US troops are being reinforced, and are trying to fight to regain control over areas of Iraq where there are forces hostile to the civil government and to the US. Some in the US military think they can win, and believe the British too could reassert control over Basra if the UK government committted more troops to doing so.

I fear the US will come to the same conclusion as the UK authorities in due course. At some point all foreign troops need to withdraw, leaving keeping the peace to the Iraqi civilian authorities. If peace cannot be kept without a very large army of occupation, and not kept to an acceptable standard with one, it implies the political settlement is not the right one.

Maybe the US and the UK should have further talks with the main groups seeking to uphold and undermine the civilian government, to gain a better understanding of the options. Street fighting has been going on for a long time now, and has not brought a peaceful settlement in sight.

It is increasingly difficult to understand why our government leaves our troops at risk in such a situation. Once opponents know your troops are leaving, it raises their aggression to claim credit for driving you out. The Americans are right about one thing – if you are staying your government needs to show resolve, by reinforcing and giving troops the equipment they need.

Falls on the Stock markets??have been????the inevitable outcome of

a) Absence of knowledge of where the bad debts lie and how many – if any – institutions are in trouble

b) Central Banks still saying interest rates in Euroland and UK may go up

c) Very public announcements of how much temporary assistance has been needed each day to see the system through the jitters

??Markets will rally and stabilise only when

??a) Market participants can form a sensible judgement of how much damage has been done

b) They think the authorities no longer want there to be more declines (so-called re-pricing of risk), and have shown that by telling markets interest rates will start to fall as inflation is under control.

??The rally on the back of the US offering some money to the banks themselves at a less penal rate is not a solution to the whole underlying problem. It stops immediate illiquidity, and allows some more slightly higher priced business to take place, but it does not tell markets that the sub prime crisis is over and we know its full effects.

Andy Burnham went on to Sky with me this morning.

He gave his usual rant about how any tax cut will mean the end of civilisation as we know it.

When I asked him how Labour had managed to cut Corporation Tax without damaging services, he admitted it could be done (the answer should have been in their case, by putting other taxes and borrowing up!)

When the interviewer asked him why tax cuts couldn’t be paid for out of savings from waste reduction (after all the government itself has said it is wasting ??22 billion a year!), he had no convincing answer. I guess the Labour answer is because they do not know how to stop the waste.

When I put to him that as the economy grows so the Treasury pockets much more revenue, he seemed in denial of this obvious point. He had no answer to the experience of Ireland. They cut rates, this boosted receipts from extra growth, which enabled them to spend more on public services and cut rates again.

Andy Burnham concentrated on asking me if I agreed that the abolition of Inheritance Tax should be paid for by extra green taxes. He seemed unable to understand that I had already explained how the tax cuts I am proposing should be paid for – out of the proceeds of growth.

I have absolutely no intention of signing up to Labour reckless "wish list" of Tory green taxes which they are predictably and foolishly putting about. There is no need to for revenue reasons. The ??2.6 billion for the IHT/CGT proposal will be easily affordable out of the extra revenues growth generates, as will the Corporation Tax proposals over the first Conservative Parliament.

Andy Burnham should stop behaving like an over excited Council candidate in the middle of a heated election, and start to behave as the Chief Secretary to the Treasury. This government, after all, has belatedly recognised the competitive threat, and has started to cut Corporation Tax. I bet it also now cuts Inheritance Tax.

So far the US authorities have stood together – the Treasury and the Fed. They both want to lower the debt mountain. The Treasury knows this will be painful, and accepts that it will mean slower growth – fewer jobs and less business success.

This coming week will be interesting. Will the Fed decide it has done enough without lowering the Fed funds rate – and therefore the mortgage rate – or will it decide that without a proper interest rate cut the impact on the real economy may be too great?

It’s a game of chicken between the markets and the Fed, which will have serious consequences for all of us. If the Fed remains too tough for too long the US will catch a cold which will spread across the Atlantic.

I was somewhat surprised to read about the "Redwood Report" in the papers. It was the Conservative party’s Economic Policy Review. A Steering Group and several Sub groups worked away for more than a year. The final proposals were the result of collective discussion between Group members, and in some cases included discussion with Shadow cabinet members responsible for particular areas.

For example, we are grateful to John Hayes who as Shadow Skills Minister worked closely with us in shaping the chapter on vocational training, and to Chris Grayling who as Shadow Transport Secretary attended several meetings to give us his thoughts on transport policy. The analysis and proposals in these areas remain recommendations from the Steering Group.

The tax proposals were taken from Michael Forsyth’s excellent "Tax matters" Report. The occasional critic has complained that the tax section of our report is quite short, and there are no detailed costings. As our Report makes clear, we have based it on the Forsyth Report, which provides all the detailed costings and supporting arguments and should be read alongside the main Report. There seemed no advantage in doing all the work again and coming to different conclusions, given the strength of the original report and the desirability of avoiding two menus of tax reductions from the Review process.

The chapter on deregulation goes further in its proposals than the policy programme I put forward as Shadow Deregulation Secretary under Michael Howard. This reflected the strong views of many people we consulted that difficult areas like Health and Safety should be reviewed owing to the growth of a strong box ticking and essay writing mentality which does not always achieve the desired end but does cost a lot of money. Our business advisers and several members of the Deregulation sub group led by Adam Afriyie MP felt we needed to launch a debate about these areas, which has certainly succeeded! As the Times leader yesterday said so well, it is crucial that we can debate what style of regulation works best to ensure high standards of safety, and can debate how the cost the regulation imposes can be reduced where there is no great or unusual risk. Any critic who says we do not care about safe factories or good conditions of employment is simply wrong.

Labour think any Conservative proposal for tax cuts is flawed, because they think it is so difficult to answer the question How do you pay for them?

There are five easy answers to how do you pay for a tax cut?

You can:

1. Put up taxes on something else this has usually been the way Labour has financed their reductions in the main rates of Income Tax and Corporation Tax. Overall Labour has greatly increased the burden of taxation.
2. You can borrow more Labour has also done a bit of this to pay for their tax cuts. They have borrowed more as well as taxing more.
3. You can cut spending by removing things from the budget that government does not need to do a future Conservative government could scrap ID cards, abolish much unelected regional government, cut out many quangoes, reduce the size of the civil service by natural wastage.
4. You can reduce waste this government says they have been wasting ??22 billion a year, a little bit more than their estimate of the cost of all the Conservative Economic Policy Review tax proposals put together!
5. You can phase in tax reductions as the economy grows, bringing in more revenue naturally.

I was asked by the Conservative party to set out preferred tax reductions as part of the Conservative official policy of paying for tax cuts out of the proceeds of economic growth. I am happy to support this approach, as it is a powerful one. I drew them from the Forsyth Report, where they are all set out in a detailed way with costings.

Labour seem quite incapable of understanding compound arithmetic. For every 1% growth in the economy, the Treasury receives around ??5000 million extra revenue from the higher incomes, more jobs, more transaction that take place. The economy over many years has been averaging 2.5% growth every year, giving the government ??12,500 million every year extra. It does not need to spend all of that some can be given back to the long suffering taxpayers. This extra revenue is on top of the impact of inflation, which also increase the tax take coming in, and helps pay for the inflation of public sector costs.

Over a three year period the government would be in receipt of more than ??40,000 million extra in annual revenues from 2.5% annual growth. So the Conservatives could adopt my tax proposals comfortably during a first Parliament in office, paid for from the proceeds of growth, and have plenty left over for extra spending on public services.

It was strange enough to see the Chancellor out and about on the media yesterday seeking to condemn my Economic Policy Report, when we are in the throes of a very serious financial crisis. You might have expected him to be working behind the scenes with the FSA and the Bank of England to assess the damage to banks and financial institutions and to keep in touch with the ECB, the Fed, the US Treasury Secretary and the Japanese authorities, rather than preoccupied by old fashioned party politics.

It was another important day in the markets, and the US change of stance had an immediate and dramatic impact on London as well as Wall Street. It is,however, unlikely to be the end of the problems caused by the move from lax monetary policy to a credit squeeze.

It was even stranger to hear him revealing his economic ignorance, when he told the nation of the damage that taking ??21 billion (his assessment of the costs of all the tax proposals in the Report) out of the economy would do. What ever does he mean by that? The ?21 billion stays firmly in the economy it is just that the government does not get its hands on it. The whole point of reductions in tax rates is to stimulate more growth and jobs, as the private sector is usually more creative and successful at spending such money well.

He is quite entitled to ask how the tax cuts we propose should be paid for. The Report makes that clear they would be phased in as the natural growth of revenues in the economy allows. He should remember that his own government announced some tax cuts in the last budget. These were paid for by extra borrowing. Presumably he does not think that will take this money out of the economy!

You can download a copy of the Economic Competitiveness Policy Review <a href=" http://www.conservatives.com/getfile.cfm?file=ECPGcomplete&ref=GENERALFILE/3585&type=pdf">here</a>.

To have a sustained rally in markets we need lower interest rates, and a clearer statement about the impact of losses on the main banks.

The Fed tried offering cash to the market but that on its own did not work. Now they are cutting the rate they lend to the banks, but not the main Fed funds rate. That helps a bit more.

This financial crisis has been created??by the Central Banks. They kept rates too low for too long, allowing a big build up of dodgy debt. They then made big increases in rates from a low level which has started to destabilise the whole debt structure.

They now have to decide when they think they have done enough to??slim the debt bubble, without doing so much that they bring the rest of the economy down too.

Clearly the Fed are edging towards lower rates, the only medicine that does – after a lag – always work.

If any government Minister wishes to allege I want lower standards of health and safety in the workplace,??they??will be wrong.????He or she ??will also discover they are throwing stones in a glasshouse.

They should ask themelves why

168 service personnel have died in Iraq (March 2003-9.8.7)

70 have died in Afghanistan?? (Nov 2001 – 12.8.7)

Hundreds ??have died in custody in the last decade

5,890 patients died where c.dif or MRSA was mentioned on the death certifiicate in 2005

??

I and my colleagues voted for the offence of corporate manslaughter to be extended throughout the civilian public sector.

We have pressed for more helicopters, more body armour and better protected vehicles for our troops in the Middle East.

We have argued for better infection control in hospitals.

??

The Chairman of a Hospital trust has sent me a list of 94 different bodies and officials who "have an oversight role" in the case of a hospital.

The list includes necessary ones like the General Medical Council, the Department of Health and the auditors.

The fact that it runs to 94 does make you ask can anyone run an organisation for 94 different bosses, and how can the government ensure no needless overlap and no gaps in supervision when so many are involved?

It also leads on to ask how effective all this regulation is, when nationwide in 2005 almost 6000 patients died with?? MRSA or c.difficile caught in hospital mentioned on the death certificate.

We are not short of regulators and overseers in these services, but sometimes we are short of that combination of commonsense and effective use of resources to solve problems like hospital infections. ??When did you last see a Regulator at work with a cloth and some disinfectant?

It was not surprising to see a further fall as markets reflected on the absence of good information on how big the losses have been so far on difficult loans, and who has incurred them.

The Central Banks??must have realised markets would fall further whilst all the uncertainties about future interest rate levels and banking losses ??remained. Their silence on cutting interest rates is deafening. The markets yesterday??moved in the direction of thinking ??the Bank of England would not increase interest rates again. Sterling fell, and future interest rate pricing adjusted accordingly. The Bank’s monthly cycle of meeting and reporting looks very slow moving now. The Bank’s official position does not rule out a further increase in rates.

The ECB last left markets expecting a further rise in their rates. If and when they change this position it will seem to imply they have given in to French pressure to keep interest rates down. It would also be a sensible response to the slowing of the Italian and French economies and to the movements in the markets.

As readers of this blog will know, I have never thought simply supplying liquidity to the markets solves the problem. It eases daily pressures,and can sometimes fuel rallies in prices, but it does not tackle the underlying reality that banks and investors have lost money and are unsure how big an impact this will have on balance sheets and willingness to enter future transactions.

Confidence can only be rebuilt when we know the magnitude of the impact of the losses and when investors believe Central Banks have shifted from fighting the last war – against inflation – to fighting the next war – against lack of confidence.