On Tuesday I was sounded out by a senior representative of a continental government over the position the UK will adopt towards EU issues, in the event of a Conservative majority in Parliament after the next election. Given the large number of misunderstandings or wishful thinking on the part of several continental governments, I thought it a good idea to set out in a more public forum the position, to try to clear up some of the misunderstandings.I list beneath nine misunderstandings put to me during the course of the meeting.

1. “Presumably David Cameron will not fulfil his promise to withdraw Conservative MEPs from the European People’s party grouping, as that would entail loss of influence etc”

On the contrary, David is determined that all official Conservative candidates in the next European election will stand on a ticket which precludes membership of any federalist grouping including the EPP. The only reason existing MEPs have not withdrawn is they promised to belong to the EPP before the last election. He will keep his word to the party, and our candidates will keep their word to the electorate if elected.

2. “We assume the Conservatives will go along with the European project and with the Lisbon settlement – the UK has always in the past joined in, albeit reluctantly and late.”

It would be unwise to make such an assumption this time. When Margaret Thatcher came to power she did want to complete the Single market, and when Tony Blair came to power he did want to give the EU more powers over social and employment policy. The modern Conservatives have no wish to grant any more power to the EU. Moreover, we have voted against Nice, Amsterdam and Lisbon because we disagree fundamentally with them, and expect powers back. As William Hague has said, we cannot leave matters as they are if Lisbon has been ratified by all countries.

3. “What can the UK do if Lisbon has not been ratified by all countries?”

An incoming government can keep its pledge to give the people a referendum. If they vote No to Lisbon the government will repeal the legislation and the Treaty is dead.

4. “ Isn’t the UK business community strongly pro the EU, so doesn’t that mean any new government will in practise have to go along with EU plans?”

That is a typical continental misunderstanding of elite versus popular opinion and the relative importance of the two. It is probably the case that senior corporate managers of EU multinationals like Unilever are well disposed to EU integration. If you poll UK managers and executives as a whole they are likely to be as Eurosceptic as the rest of the population. Entrepreneurs are likely to be against higher taxes and more bureaucracy, whether it comes from London or from Brussels.

5. “Surely the UK government will just accept what has gone before as it will want to have influence over the EU”

We will be happy to reach common agreement with other countries on matters of common concern if that is possible, but we have no wish to use the system to force other countries to do things they do not want to do, any more than we want to be told what to do by a majority vote we have lost. We are seeking to run the government of the UK better – we do not harbour ambitions to try to run Germany or France by proxy through the EU.

6. “Isn’t the UK worried that it might lose jobs and investment if it does not go along with the majority”

No. We believe companies in neighbouring countries will continue to invest and trade in the UK all the time it makes business sense to do so. The WTO trade rules also prevent retaliatory action, were any member state thinking of such a course. We do not believe our neighbours would wish to behave like that, especially as they sell us so much more than we sell them.

7. “Won’t the UK join the Euro in due course, once a few more years have passed showing it is a success?”

No, we have won the battle to save the pound. If Blair could not persuade the British people to vote for it during his period of popularity, it is not going to happen. An incoming Conservative government will be against joining the Euro in principle, so it would be foolish of the EU to raise it during any Conservative government’s period in office.

8. “ The UK should understand that Lisbon marks the end of changing the institutional arrangements”

We don’t believe that. Every enlargement to date has been accompanied by the transfer of further powers to the EU. The EU is already working on ways of strengthening the Common foreign and security policy and common defence. David Cameron has ruled out contributing to a common European army.

9. “The UK has to show some flexibility to be a good European. After all France has to show flexibility on defence in return for the Common Agricultural policy. Germany allowed a wider range of countries into the Euro than might have been sensible to show willing over European political union”

The continent has to understand that the UK electorate does not want to be part of a political union. We want CAP reform, as it means dear food whilst penalising developing countries.

10 When I asked “Now the EU has extra powers, what is it going to do with them?” Will it do anything that we might like – cutting regulation and lowering taxes for example – there was no real reply

It seemed to come as a surprise to people who do see the whole thing in terms of constantly changing the architecture to give the EU more power, without communicating the purpose or vision behind taking those powers. It seems to be a case of “We need these powers because we need them because we need them”.

I always knew the former Chancellor was no good at economics. Whilst most people were busily repeating Labour spin about his genius at running the economy, I was critical of the way he trashed the Bank of England and taxed the pension funds to death at the beginning, disagreed with the huge surge of public spending, borrowing and credit in the middle, and disliked the stealth taxes, the nationalisation of Northern Rock and endless changes to the figures that followed. He is now reaping what he sowed. Far from having the best placed economy to handle the downturn we have one of the weakest.

I did always think, however, he was a very shrewd politician. He after all was a colossus in a party of minnows - so much so that none of the pygmies around him dared to offer their party a choice when he finally saw off Blair. Gordon Brown was in many ways the arch spinner of the Blair era, and the Brown era was ushered in with a welter of new spin. So confident was the new regime that they even spun that they did not spin, knowing that spin had been discredited. The endless rows and disputes of the Blair/Brown years ended with the departure of Blair. It looked as if the new era would be one of iron discipline and message control.

The last few days show a complete breakdown in political discipline. Miliband’s recipe for a better government was bound to be seen as a leadership bid by a media hungry to take the leadership story on. Journalists are clearly being fed many stories by Labour MPs and briefers about leadership uncertainty. Harriet Harman’s people must have briefed she would be the first woman in Number 10 since Margaret Thatcher, in charge for a week of Gordon’s holidays. That too was bound to lead to unhelpful speculation, and looked bizarre when someone counter briefed that the PM himself was still in charge from the beach. Friends of Jack Straw have been busy denying he is putting himself about at this sensitive time. We read that maybe 10 junior Minsiters are ready to resign to destabilise things further, and that Alan Johnson is wanted to help put the “message” across. You would need to be some snakeoil salesman to sell to the public the current toxic mix of higher taxes,more public waste, higher borrowing, and a sharp squeeze on everyone’s income to pay for some of the public excess.

Last year an eager Prime Minister used the first excuse to return to mind the shop, cancelling the holiday. He could easily have spared more time away. This year he has been persuaded to take three weeks off. That is a very long time in the hothouse atmosphere his colleagues are creating. There is the danger that the political “narrative” as Labour like to call it will have been wrenched so far away from the one the PM wants by the time he does get back that it will be difficult for him to turn it around. Last year he took too short a holiday. This year he may end up taking too long a holiday.

As there are phones in Southwold he would be well advised to use them to get a grip. He needs to assert his authority over Miliband, Harman, Johnson and the rest as quickly as possible. He needs to supply some sense of direction to the country as awell as to his party.

Over the Brown years the Chancellor/PM has applied an iron law to the Opposition - they must speak no tax cuts and no spending increases. If they venture either Labour reserves the right to list the worst kind of spending cuts to “pay” for them, as no “unfunded” spending increases and tax cuts are allowed.

Gordon Brown has ignored this rule himself, increasing spending massively (often on the wrong things) by increasing borrowing. He has from time to time tried to pay for the increased spending through tax increases, but these are usually unpopular and recently have derailed him This has led to a series of spectacular partial reversals of budget policy (10 p compensation package, cancellation of prospective fuel duty increase, review of VED increase, partial climbdown on CGT etc).

Today we learn of the final irony - he is considering, according to the briefing, a package of unfunded tax reductions!

As if we needed more government debt. Government debt is simply taxation deferred, where we the taxpayers not only have to repay the debt with taxes, but have to pay interest on it as well.
It can make sense for governments to borrow during a downswing or period of slow growth, but isn’t this government already doing that to excess thanks to their mismanagement of the economy and the cycle?

If Gordon at the eleventh hour is looking for some tax cuts they should at least be funded out of reductions in much hated spending, like all the spending on regional government in England, the ID cards computer and the apparatus of his surveillance society.

Meanwhile, the Conservatives will wisely stick to Prudence, and prepare themselves for the shock of just how bad the budget deficit is going to be by this time next year. Does no-one in government care at all about the surge in government borrowing? Do they think the markets will just let them get on with it, without extracting a price?

Can the government rescue the mortgage market? This question is being asked today by the government’s own adviser, as if the mortgage market can be sorted out in some kind of a vacuum, detached from the rest of the banking sector.

I can understand that the government wants to stabilise house prices, and fancies that making more mortgage finance available might do that. It is proof that not even the government believes its theory that the rate of new housebuilding determines house prices, for if it did believe that it would be delighted that not many houses will be built this year, and would be urging the cancellation of even more new build projects to stop the price fall.

Meanwhile over at the Bank of England they are less concerned that house prices are going down than that the prices of energy, food and other essentials are going up. They could take action to make more mortgage money available, by cutting interest rates to stimulate mortgage demand, but they fear that might lead to more money being borrowed to push up the prices of other things. The FSA could help stimulate the supply of mortgages by relaxing their requirements for the amount of capital a bank needs to sustain any given level of lending, but that too is unfashionable just after a period when banks lent too much without the capital backing the Regulator now thinks they need.

There is no evidence of any “joined up” thinking between government, Bank. FSA and the banking sector about what to do. The Bank and Treasury have lurched away from their view of last summer that banks had to sort themselves out, and it served them right if they had to rein back. They have not arrived at a new consensus on how loose or tight they now want monetary policy to be. There are some home truths the government needs to grasp before it makes more foolish statements about the mortgage market:

1. The mortgage market cannot be detached from other types of lending to people and companies. Many mortgages are advanced by banks who also lend for other purposes. Their ability to lend overall is constrained by the amount of capital they have and by the Regulators’ rules on how much capital they need to have for any level of lending. If the government wishes to solve the mortgage famine it needs to solve the banking problem generally.
2. House prices are still high relative to incomes , following a period of massive credit expansion which the Treasury and Bank together encouraged by their low interest rate easy money policies of 2001-6. This was also fuelled by the Regulators effectively encouraging off balance sheet ways of financing mortgages. On the government’s analysis and view that houses are not “affordable” it might prove necessary for there to be a sharp fall in house prices before the market starts to function as the government wishes, as people are being squeezed generally so they cannot afford to trade up or to buy a first home at current prices.
3. Keeping interest rates up also prevents housing recovery. Banks look at how easy it is for someone to afford a mortgage on their income. A mortgage at 8% is twice as dear as one at 4%, and so is ruled out for many people on modest incomes.
4. The nationalised Northern Rock is damaging the mortgage market, as a major lender is unable to increase its mortgage book – indeed it is having to run it down to repay government borrowings, and cannot compete strongly owing to Competition rules over state aids. Selling that bank on would help the market.
5. The government needs to accept that it cannot keep house prices up, stimulate more mortgage lending, cut inflation and place a windfall tax on the banks all at the same time. These different aims pull in different directions. Its first moves have to be to encourage the recapitalisation of the banks so they have the balance sheet strength to lend more – the government itself needs to concentrate on finding a solution to Northern Rock, so that bank can lend more. Windfall taxes are incompatible with this aim. In the meantime it has to accept that houses prices on most forecasts will fall more this year and next. The sooner they do so, the sooner homes will appear more affordable. The authorities could cut interest rates to lessen the extent of the fall needed to price people back into mortgages and homes.

Current policy is incoherent. Interest rate policy is encouraging house price falls. Banking regulation is restraining new advances after a long period of allowing lending growth. Housebuilding and planning policy is trying to encourage further price falls. Attacking banks for being too careless in their lending as the Chancellor did last year encourages a more restrictive attitude towards lending.

What do the government want? Perhaps they should decide that first, then they have to bend every policy instrument to that aim. They never did answer my question about how far they think house prices need to fall to be “affordable”, yet they have gone on about how they are not affordable. Muddle over that is at the heart of their problem.

Many Labour MPs have found the answer – windfall taxes. They are proposing a veritable blizzard of these windfall taxes – one for the oil companies, one for the electricity utilities, and yet another for the banks! It leaves the sane asking “What then was the question?”

Would windfall taxes bring down inflationary price pressures? No, not by one penny. Indeed, if the companies they want to tax have real market power as they suppose, they would put their prices up to help pay the tax!

Would windfall taxes make the government popular? Unlikely, as people are fed up with not having enough money in their own pockets – lining the governments pockets some more is not going to make them feel better off.

Would windfall profits improve the efficiency of the sectors paying the taxes? Of course not. It would be more likely to lead to delay or cancellation of some capital investment that could make them more efficient or raise capacity.

Could windfall taxes be routed directly to those who have been losing out under this government? Yes, they could , but that doesn’t look likely. If they used them to pay for the restoration of the 10p tax band that could help a little, but it would still leave us with more damage to business. The government seems resolute in not wanting the cancel its Income Tax hike from the last budget.The banks need more capital, not less. Taxing them more delays the day when they have enough capital to lend on a sensible scale to lift the economy.

Would windfall taxes cheer the left of the Labour party because it would be bashing shareholders, pension funds and savers? Would it be another good hit at the managing and saving classes? Yes, undoubtedly.

Windfall taxes would be great news for the Conservatives, as it would confirm Labour had lost the plot, but bad news for the country.

The government has stuck to its idiot view of house prices - it believes they reflect whether enough new houses are being built or not. All the time house prices were rising they told us it was because we were not building enough. They used the rise in prices as an excuse to demand the concreting over of the South-East, against the wishes of many electors whom they attacked as Nimbys.

Now house prices are plunging, on the same logic, the government should be saying it shows too many houses are being built. They should be welcoming the savage cuts they have forced onto the housebuilding industry by their boom/bust credit policies, as that should be the right response to too many houses, visible in the falling prices. They should be scaling back their demands for more construction, which look more and more ludicrous by the day as we watch the housebuilding industry in free fall close down site after site.

Instead, on the BBC this morning prominence was given to a forecast from the National Housing Federation that house prices will rise by 25% over the next five years, and by more in the South-East. This forecast is out of line with the typical forecast of further falls in 2008 and 2009 leading to a substantial drop in house prices, followed by a slow and moderate recovery. The BBC presumably gave it airtime, and on most mentions did not juxtapose it with the gloomier consensus forecasts, because they want to help the government talk the market up. If only it were that easy.

House prices are likely to fall further because the mortgage market has dried up, and because the Treasury and Bank are keeping conditions tight by running off the Northern Rock book and by their approach to interest rates.

I am going to ask some questions of how that forecast was arrived at, and ask Ministers to explain the inconsistencies of their appraoch to housing forecasts and price changes. The government comes across as ignorant of what really makes house prices go up and down, out of control of the money markets and therefore the mortgage markets, but still as determined as ever to force more houses onto the South East than voters want. They should instead reckon on many months of little new building activity and falling prices.

Most politicians naturally assume public spending is good and more public spending is better. They implicitly assume that you can buy votes with other people’s money. This belief has underpinned the long upwards movement in public spending of the last hundred years, punctuated only by the odd financial crisis forcing retrenchment (e.g. 1976) or by the occasional political period of calculated “austerity” ( e.g. 1981-3, 1997-2001) when spending has grown less fast than the economy.

It is strange politicians believe this, as there is plenty of evidence that big areas of public spending achieve the opposite effect to that desired by the politicians. The last few weeks have shown how spending or promising to spend huge sums to repair the damage of the 10p tax cut, to create jobs in Scottish ship yards, and to win votes in the Commons have not brought any joy or new support for the unpopular government writing the cheques.

There are fundamental reasons why a lot of public spending is unpopular. Public spending takes five main forms:

1. Granting money back to you.
2. Granting money to others.
3. Spending on the delivery of public services you might use.
4. Spending money on the delivery of public services you dont use.
5. Spending money on government itself.

Spending money on giving you money back is the most popular of these. It does ,however, lead some of us to ask why take the money off us in the first place? It means we are worse off than if the government did not take the money and then give it back, as two expensive lots of officials are involved in taxing us and giving us benefits. It also means our freedom is limited to some extent, as you usually have to live in a particular way to qualify for the money back.

Granting money to others can be very unpopular with those who have to pay the bills. Whilst most of us are happy to pay tax so that badly disabled people can receive an income and receive some comforts for their condition, many are not happy to subsidise the neighbour they think could as well get a job and pay tax as they are doing. MPs receive many emails and letters from people complaining that the benefit system is too generous to some. This phenomenon is even more common in the company sector. I remember as a Minister at BERR (DTI as it then was) how many letters we used to receive from companies complaining that we were subsidising their competitors with grant aid that seemed to them unfair. Only a minority of companies receive grants, leaving the majority cross that they have to pay more tax to pay for the grants to the others.

Spending on the delivery of services you use is usually popular. Most people want to know there are enough nurses and doctors in the local A and E in case they have an accident. Parents always want their local school to get plenty of money. It is not the same for services people never use. Some single people or people beyond the age of parenthood do complain about education spending, healthy people sometimes complain about health costs, and many people complain about the costs of quangos supplying services we could well live without. Who wants regional government in England, or more planning consultation documents where the replies will be ignored?

The most unpopular form of spending is spending on government itself. The fascination with the expenses regimes and salaries of Ministers, MPs, quango chiefs and local authority chief executives in recent months is a symptom of a growing frustration. People think the costs of government are out of control, and need to be cut.

This government has allowed people to become very sceptical of how much if any of the additional spending will get through to services they want to use, or will end up back in their pockets. People feel they are getting a rotten deal on public spending because they feel too much is going on government itself, or on transfer payments to people and companies that should not receive it, or on waste within public services that are needed.

People feel overtaxed because they are overtaxed. A government that still thinks all public spending is popular and that we need more of it understands neither the public nor the nature of public spending. Just as some people are jealous of high pay in the free enterprise sector, so many are now jealous of the winners from the government spending lottery, which favours those at the top of the bureaucracy and quangocracy.

When a party is as down and out as Labour is today it is conventional for them to debate whether they should now concentrate on salvaging something by pandering to the core vote, or drive decisively to middle Britain and ignore the many party cries for a more traditional approach. It is only fitting that Labour should now agonise over this, as they have spun for years that the Tories can only do well if they ignore their core and position in the centre ground.

I do not believe in the conventional descriptions of UK politics based on a left-right analysis. Some of the defining issues no longer fit in such a geometric pattern. Euroscepticism is not a monopoly of the right, and is held passionately as well by the Benn wing of the Labour movement. Pulling out of the EU was after all Labour policy in the 1980s. Wishing to restore our civil liberties is a passion of many of us Conservatives today, but there are other Conservatives who hold more authoritarian views, whilst many in Labour hate their government’s attack on our liberties. The left tries to make out that only they would pay large sums into our schools and hospitals, yet both main parties believe in free treatment and free school places and accept that requires substantial and increasing sums of public spending on them. The new divisions are Eurosceptic versus Euroenthusiast, and freedom loving versus turning to the state to seek a greater sense of security and direction in private lives.

Mr Brown will be unable to learn any lesson from recent electoral reversals that requires getting powers back from Brussels, or requires allowing us greater freedom. He is too hooked onto the Euroenthusiast agenda of more power to the centre, and too persuaded that he needs to take more control over our lives to fight his own miserable version of the “war” on terror. He will need to look elsewhere for policies that might chime with an increasingly sceptical electorate.

In the economic sphere there is a clearer distinction between Conservative and Labour, and between Blairism and old Labour. It is here the battle will be fought for the sole of Brown’s Labour. Is he truly a Blairite moderniser, as he sometimes spins, or is he an unreconstructed tax and spend socialist, as his actions since 2001 indicate? Will becoming even more of a tax and spend socialist help win back the core vote, or does he need to become less of a tax and spend socialist to win back some “centre” votes?

Blairites believe that public services should be opened up to more competition and choice. They believe that whilst delivering free medical care and free school places remains important, this can be done more effectively through a range of providers, some of them in the private or charitable sectors. They see the inefficiencies, poor quality and high cost of some monopoly state provision. Socialists believe that these services must be supplied in a uniform way by state employees through a monopoly service, and persuade themselves that any problems of quantity or quality simply reflect a lack of “funding”.

Gordon Brown has elements of both in his thinking. In his statements he tells us the Blairite reforms carry on. He claims to favour a wider range of different types of school, and wants private treatment centres hired by the NHS to provide specialist facilities. However, as Chancellor he was often the roadblock to reform, and as Prime Minister for all the fine words there is not a lot of evidence of major reform on the ground. He increased spending massively to test out the old Labour proposition that there was nothing wrong with monopoly state services that large injections of cash could not put right. Now in power at Number 10 he faces the conundrum of what do you do when the public services are still not good enough and you have run out of money?

The irony of the PM’s position is clear. He will continue to speak as a moderniser but will operate as a traditional high spend socialist. The one thing he is likely to conclude from the bruising rows of the last few months is he should drop all moves to higher taxes, and just borrow and borrow and borrow. The left has largely given up on the idea that taxes on people should be raised – after all the left somewhat belatedly joined Conservatives in complaining about the last income tax hike. Trade Unionists will have another go at taxing energy companies, just as oil prices start to subside. The demand will be popular, but the Chancellor if he goes there will probably end up making another mess and become impaled on an increasingly international and vociferous business lobby capable of shifting profits and domiciles quite quickly if he goes too far.

All this leaves Gordon Brown to do as he will see it is to spend more and more on Labour areas and Labour causes. This will make the economic position worse. Years of high spending on the inner cities, and years of skewing spending to the north and west away from the more prosperous south and east has failed to narrow the gap. Over the last eleven years the more they have spent in the public sector the bigger the regional gap has grown. This will not deter them.

Heaping more public spending on will delay the interest rate cuts the UK economy needs to revive its housing sector. Spending more in the public sector will intensify the squeeze on the private sector and lead to more job losses there. It will reveal to all who still do not get it that Gordon Brown is very much a high spend socialist. It will also bring his government down. It’s the economy stupid. More public spending is not the way to fix it.

If he wants to revive his political fortunes he does need to get a grip on the public sector, and reduce the squeeze on the private by cutting taxes and interest rates.

In the last three months on this site you have responded most to the following topics:

David Davis
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English Democrats
The Irish referendum on the EU
Inflation
The battle of the Somme
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(Top ten in order of number of responses per item)

Labour’s loss of Glasgow East has come after the start of the long Parliamentary recess. It means John Mason will have to wait eleven weeks before he can take his seat, eleven weeks before he can say anything in Parliament about why he won and why the electors of Glasgow are so fed up with Labour. It also means Gordon Brown is spared analysis and hysteria about the result around the tea room tables in the Commons. His MPs are already well dispersed and some no doubt busy with other things.

As one who had thought the polls and pundits would be right in predicting a very narrow Labour victory, it does make a difference that they could not even cling on to their 3rd safest seat in Scotland. The turn out was respectable for a by election – some Labour voters were angry enough to go to the polls and vote for a different party.
Labour in the form of Mr Alexander tells us they “will learn the lessons”. We heard that after Crewe and after Henley as well, in the measured tones of an undertaker addressing the bereaved family.

I doubt that very much. To those who say the problem is Gordon Brown – his appearance, his tone of voice, his approach to people – I say he has changed himself a lot. He can now tie his tie tidily, he sports a much better hair cut, he has bought some new suits, and has adopted a much softer and less aggressive tone of voice. I was pleasantly surprised by the way he responded to my last question to him in the House on Tuesday. Instead of asking him a question as I often do to seek to move the debate on, I asked him a highly political question. I asked if he was intending to persuade Obama he was wrong to both want early withdrawal from Iraq and to want more troops and more commitment to Afghanistan, in contradiction to present US/UK policy. He responded in a measured and thoughtful tone, and answered half the issue I put to him. He has changed a lot and become more Prime Ministerial, accepting people’s right to put difficult issues before him. He understood that it would not be good to allow a rift to open up between himself and Obama, but he also has to stay loyal to the current UK/US line.

The problem is not Gordon Brown today. The problem is the mess Blair/Brown made of the economy in the period 2001-2006. The problem is the inflation they have unleashed, and the sharp slowdown they have now generated. That is why I do not think Labour have begun to learn the lessons, because they still cling to the view that the problem is of foreign origin, and that the UK is well placed to deal with it. As readers of this site will know, I concur with neither of those premises.

If they really wish to show they have learned the lessons of Crewe, of Henley and of Glasgow, or for that matter of the last local and mayoral elections, they would take action to alleviate our pain. Just reciting the mantra they “understand how difficult things are” whilst blaming foreigners at every turn will not do. Jetting off to lecture the Saudis about the price of oil, whilst ignoring the EU over the price of food will not do.

They should take action including the following:

1. Impose a staff freeze on the public sector staff (other than teachers, nurses, doctors, police and troops and other important front line personnel). Stop the flood of spending on computers, consultancies, new logos, spin doctors, and all the other paraphernalia of the quango state. Get public spending under control.
2. Cut fuel duty so oil taxation is back on budget, helping cut inflation.
3. Cut interest rates to 2.5%
4. Reduce taxation on new exploration and development of oil and gas in the UK
5. Cut the Corporation Tax rate to attract more business to the UK
6. Announce decisions on privately financed infrastructure projects in energy, transport and water to offer work to the hard pressed construction industry.
7. Speed CAP reform to allow more agricultural activity in the UK and to give us full access to world markets for food.

If they did this theywould tackle the twin evils of inflation and slow down. They might offer people some hope that their family bills will come under some control, and offer those who fear job losses that the government wants to limit the fall in the economy. I see no signs of them doing much of this anytime soon. I have to conclude they still do not get it, as they mouth their soundbites about a foreign crisis and tell us they share our pain on their six figure Ministerial salaries.

It was fitting that warmonger Obama should make his speech in front of the Siegessaule. This ugly monument to Prussian militarism was moved to its current place and enlarged by the Nazis at the end of the 1930s. The Goddess of Victory sports wings, as if from the Imperial Habsburg eagle. They formed the backdrop to Obama’s message that the American eagle now needs German military support for its wars in Afghanistan and into Pakistan.

It was typical of the Europeans that they welcomed this man on an electoral mission as if he were a cross between a peacenik and a pop star after the warlike Bush years. They were with their media taken in by the show, and failed to listen to the substance. In a way the speech was a studied slight to Germany, as it was clearly intended for American eyes and ears, not for those patiently listening beneath the Victory column. It was understandably critical of the lack of German support for NATO in Afghanistan to impress the Republicans back home, on the basis that the alliance is committed to this long and difficult war, but it is mainly American and British troops who are dying there. It set out to show Americans that the Senator can draw a crowd of seemingly friendly Europeans, after the Bush years of tension with the leftwards inclining chattering classes of the EU.

To me it revealed how Obama will not be a force for change , despite the promises. He came over as a cynical politician speaking above an audience so his spin doctors could project him in the way they choose to the folks back home. He made it clear he is as committed to war in the Middle East as Bush, and wishes to draw more troops and more countries into the conflict. There was no statement of war aims, no understanding of how they might win, no recognition that trying to contain a terrorist movement by occupying successive countries where they might hide is not necessarily to way to stop them. In short there was no new thinking, and no hint that lessons had been learned.

Many in the German audience heard the bit they wanted to hear – withdrawal from Iraq – whilst ignoring the rest of the message – the war goes on elsewhere as if nothing had changed. To those of us who think the whole war on terror was misconceived, this was not the message of change we wanted. This was another politician from the age of spin who may be good at that, but who has nothing new to offer that will help the world he claims to love. I felt all that was lacking was a cue for the American eagle to join him beneath the Golden Goddess of war, and for the Pentagon endorsements to roll as the film came to an end.

Senator Obama is travelling to demonstrate he is a great international statesman in the making. The more he travels the more compromises he has to make, and the more hollow will seem his message of wonderful change.

Today in Berlin he has allowed himself to be billed to speak in front of the Victory Column or Siegessaule, a monument to Prussian militarism and their prowess in defeating European neighbours. It is not a wise backdrop for someone who wishes to send a message of peaceful change after the two Middle East wars of the Bush years.

More importantly, the message is no longer one of negotiate peace and withdraw American troops from far flung foreign lands. The pollsters and positioners that cluster around the big Obama cheque book have persuaded him to be tender and tough at the same time – tender on Iraq, tough on Afghanistan. They have even managed to persuade him of the Pentagon’s wish to widen the Afghan war to include the border lands of Pakistan, where terrorist now congregate beyond the reach of most American fire power. Just as Democrat Clinton became bomber Clinton under the advice of the Pentagon, reining bombs in many places in pursuance of US policy aims, so peacenik Obama is morphing rapidly into warrior Obama seeking to intensify the conflict in Afghanistan. The UK may still be in love with Obama because he is not Bush, but it is time as he approaches our shores to be more critical.

I liked his message of change and wrote favourably of his new approach to fund raising – asking for small sums from many rather than seeking big sums from the few – when he first appeared on the political radar. I thought he would do well and might go all the way to victory. I said at the time I did not think I would like his policies, although people ignored that and billed my piece as meaning Redwood wanted an Obama Presidency. I was predicting success, not backing him. I liked his use of words, his ability to reach out, and his ability to forge a new coalition of support – it was great politics. As I feared, what he is now offering should he come to power is altogether more disagreeable.

I have three charges against Obama the realist, three bones to pick with Obama the wannabe statesman. The first is I do not think he has shown a full understanding of the complexities of Middle Eastern politics. He is in danger of being neither effective peacenik nor effective warmonger, now he wants to widen the Afghan war but retreat from the Iraqi one. He has not explained how he would handle the relationship with Pakistan, and was uncomfortable in Israel. If he is unsure of the extent of his war aims and limited by positioning in how he can pursue them, it does not augur well. He will come to learn that Iraq, Afghanistan and Pakistan are all linked - succeed it making it too hot for the terrorists in one of those, and they move to another base.

The second is his possible protectionism. His supporters often say he did not mean his protectionist sentiments, and would knuckle down like the Republican Presidents before him to try to make a success of the World Trade Talks and the latest round of reducing barriers to trade. If that is so, why can’t he bring himself to make the case for free trade? If he wants to remain new and fresh, he needs to be honest. If, on the other hand, he means what he says about protection, he will help make the world a poorer place.

The third is his likely support for higher taxes. His critics claim his social security taxes will mean a hike in the marginal rate of tax on higher incomes to 50% in the USA. That would be bad for business and bad for the USA as a place for business investment. If he is going to be yet another tax and spend Democrat it means he has not learned the lesson of Bill Clinton, who in his first term was fiscally more conservative to the benefit of the US and the world economies.

After high spend tax cutting Bush we need someone who will control spending and squeeze the size of government. The world needs a President who offers policies that encourage economic recovery. The fascinating political duel that has unfolded so far does not seem to have thrown up a candidate capable of doing what it takes to speed and broaden economic recovery. Both McCain and Obama favour more overseas expeditions by US forces, and both seemed wedded to high levels of spending. Both are concentrating more on the war on terror than the war on recession and Credit Crunch. There are probably more votes in the latter.

The Parliamentary recess is a symbol and a symptom of the overmanned and under achieving public sector. Some of my Labour colleagues will tell you that MPs have to work very hard in the recess – they have to catch up with all the constituency business which the pressure of a Westminster session puts on hold. Don’t you believe them. Any efficient MP can manage the constituency visits, cases and correspondence whilst also appearing regularly in Parliament. August and the first half of September are not ideal times for visits in the constituency. In my case there is no District General hospital within my boundaries, the schools are on summer holiday, and many businesses over August will be short of staff as they take their well deserved summer breaks. It is easier to keep up to date than to allow a backlog to develop that needs clearing in the recess.

I do plan to take some time off in August, but I think it is quite wrong that I am shut out from my main place of work and prevented from carrying out my main duties from July 22nd until October 6th! That’s a massive 11 weeks. Why does the government want to keep Parliament out of action for so long?

Doubtless they see it as a chance to have some respite from questions, criticisms and debates which highlight mistakes and problems. As from yesterday MPs are prevented from tabling a subject for debate, from asking oral questions of Ministers in Question Times, from tabling questions for written answer, from tabling EDMs and signing them, from participating in a committee, from asking a Minister a question during a debate or making points in a debate. We will have eleven weeks with no Ministerial statements to Parliament explaining what they are doing or reporting on errors and difficulties, no time to examine the secondary legislation they will still be drafting and pushing through, and no time to raise matters of public concern.

For the government it is a chance to dominate the media by using their spin doctors each day to pump out a story or a stunt, uninterrupted by criticism or an alternative agenda from Parliament.

At the very least there should be a session at the start of September before the main political conferences. This need not be a legislative session, as we have quite enough new primary legislation and do not wish to encourage more. It could combine Question Times to Ministers, with Ministerial statements, and adjournment debates on topics that the government and the Opposition wish to raise. There need not be any votes, so MPs who wish to be away can stay on their fact finding travels or whatever else they are doing, whilst those of us who wish to hold the government to account have a Parliament in which to do it. Whilst we are about it, why not abolish the main conferences, which are outdated ideas, and ask each party to go over to a couple of long week-end conferences each year so people with jobs can attend without having to take a week’s holiday, and MPs could continue to do their job at Westminster.

Westminster is overstaffed and underemployed. It should meet more often to provide better value for money. It is entirely representative of Labour’s wasteful public sector.

John Redwood recently took part in Total Politics magazine’s “Daily Politico”. A transcript of the questions, and of John’s replies, follows:

Why did you get involved in the political world?

I was fed up with so many things working badly in the UK. I wanted to privatise the inefficient nationalised industries and create wider ownership.

When did you join the Conservative Party?

As a student.

What is your earliest political memory?

The Cuban Missile Crisis.

Which one law would you repeal?

Capital Gains Tax.

Which one law would you introduce?

A Deregulation Act.

What’s your favourite view in the world?

Lord’s Cricket Ground in the sunshine.

What’s your favourite political quotation?

“I have no desire to make windows into men’s souls” – Elizabeth I

What music gets you up to dance?

Anything with a good rhythm and if I’m with good company.

If you could have been present at any debate in the House of Commons over the last three hundred years, which would it have been , and why?

The repeal of slavery.

Imagine you are planning a dinner party, pick six people (living or dead) to invite

Nelson, Wellington, Elizabeth I, Victoria, Josiah Wedgwood, Cory Aquino.

Who is your best friend in politics?

Michael Fallon.

What’s your favourite form of transport?

Car.

What’s your favourite dish?

Fish Pie.

Do you have any phobias?

No.

What do you dream about?

Some things are private!

What’s the last thing you bought in a shop?

Shoes.

What’s the funniest You Tube video you’ve recently seen?

Gordon Brown in the Commons picking his nose.

What is the best speech you have ever heard (and been present at)?

Bill Clinton to both Houses of Parliament.

What is your favourite comedy?

News Diary.

Which is your favourite political biography or autobiography?

Elizabeth I by J. E. Neale.

What is your favourite novel?

Lord of the Rings.

Name a book you have read which has failed to live up to expectations

Too many to name!

What job would you be doing if you weren’t involved in the political world?

Executive chairman of a large company.

Do you have a party trick, or hidden talent?

I like reading poetry for others.

What’s the best holiday you have been on?

Scilly Isles.

Where in the world would you most like to go on holiday?

Australia.

When was the last time you used public transport?

This morning.

When was the last time you went to the theatre and what did you see?

I went to see the Merry Wives of Windsor at the Globe last week.

What do you collect?

Memories.

What is your most unusual hobby?

Photography.

Which newspapers do you read regularly?

Daily Telegraph and the Financial Times.

Which websites do you visit regularly?

Iain Dale’s Diary, ConservativeHome.

Which magazines do you subscribe to?

None.

Which five words would your friends use about you?

Honest, energetic, consistent, decent and kind.

Which five words would your enemies use about you?

Cool, logical, humourless (and those are the kinder ones)!

Are you into sport? If so, which ones?

Yes. Cricket.

Who is your favourite football team and player

Reading and Ronaldo.

Who is your political hero?

Elizabeth II

Who is your political hate figure

Karl Marx.

What’s your most memorable time in politics?

Helping with the battle to save the Pound.

What’s your prediction for the next general election?

Conservative win.

Who is your favourite and least favourite political interviewer?

Favourite – Paxman. Least favourite – Kirsty Wark.

Which current foreign politician do you most admire?

Morgan Tsvangirai.

What do you listen to / watch when you get up in the morning?

The Today programme.

Complete this sentence: The thing I hate about politics is…

Spin.

Complete this sentence: The thing I love about politics is…

…when you do something that makes people live better.

What would you like your political epitaph to be?

He fought for liberty, democracy and limited government.

Whilst the politicians in the USA are thinking of legislating to stop speculators in commodities, and MPs in the UK are busily enquiring into whether there has been speculation in commodity markets or not, the real world has moved on apace. The share prices of commodity producers are indicating falls in energy and some commodity prices, oil has tumbled more than 10% in a few days, and some metal prices are in retreat. As so often, the politicians are busy talking about shutting stable doors long after the race horses have bolted.

No-one can be sure this is the decisive turn we have been waiting for in commodity and energy prices, but it has been likely for a few weeks that some of the froth will now go out of these markets. The news background for final demand for energy and raw materials is grim, with Asia tightening to squeeze high inflation out of the system, and with the West still in the iron grip of a Credit Crunch with a weakened banking system. If commodity prices are ever going to come down, now would be as good a time as any. It is most unusual for the price of anything to surge ever upwards in a straight line.

I have written before on how there is speculation and investment in commodities as well as higher overall demand from Asia, and explained how this could depart as quickly as it arrived. I find it odd that anyone could think otherwise, or think it worth spending time debating it. Once speculators and nervous investors see prices falling, some will decide not to hang around and will add to the selling pressure.

It is good news today to learn that there is strong price competition on the forecourts lowering the prices of petrol and diesel at last, after several months of ever rising prices. It reinforces my message to the Bank of England - fight recession, inflation will subside as and when these prices come down. The markets which have made it so difficult for muddled Central Bankers in recent months are at least temporarily coming to their aid. Let’s hope, like drowning men and women, the Monetary Policy Committee members grab this lifeline now it’s being thrown to them. They should cut interest rates without delay.

(Please note this expression of opinion is not investment advice)

It was music to my ears to hear Nissan’s revision today of their position that if the UK did not join the Euro they would invest elsewhere. They made a clear commitment to invest in Sunderland to produce their next new European vehicle there.
When Nissan made that foolish comment it was damaging to those of us who were battling to keep the pound, and welcome ammunition to Blair/Mandelson trying to find a way to move the debate in their favour to abolish our currency. I was surprised that such a good manufacturing company should allow itself to make such a strong comment on such a politically sensitive issue, and had to devote time to explaining why it was unlikely to be true.
As I pointed out at the time, business people make decisions on where to place factories and to make new investments on a range of factors that determine whether the investment is likely to be profitable or not, and whether it is likely to offer more sustained profit on a reliable basis than in some other location. Proximity to market, access to good components and raw materials, the ability to recruit and retain a good workforce, tax rates and the regulatory background are all important issues. It was never likely that a country’s choice of currency was going to be the one decisive factor.
The irony today is that one of the important influences on persuading Nissan to base their next new European car production in Sunderland will be the decline in sterling against the Euro in recent months, making the UK more competitive on price than Euroland. All of Nissan’s future cashflow and profit figures on their new car will look better because sterling costs are lower than inflated Euro costs. It would be a different story today if Nissan had set up in Spain or Italy, where they would now be struggling to control inflationary costs against the background of a rising currency making them uncompetitive.
Nissan has done a great job in recruiting and training people in the North East to become one of the most productive auto workforces in the world. They make good products to a sensible budget and of good quality. The UK should be proud of their achievement, and they should be pleased with what their workforce has done. They should also now welcome the wise decision of the British people to keep the pound, and understand that a future government will be pledged to keeping the pound as a matter of principle.
It is the British government that needs to do more to keep and attract industrial investment to this country, by regulating less and offering a more competitive tax package.

John Redwood today welcomed the Government’s announcement that Wokingham Borough Council and West Berkshire Council are to receive additional funding to help develop and maintain their flood defences.

The Department for Communities and Local Government has allocated £30.6 million through its Restoration Fund to help local authorities affected by the floods of June and July 2007. West Berkshire Council is to receive a grant of £491,854 and Wokingham Borough Council is to receive £310,244. The Minister responsible for allocating these funds has said there will be no strings attached on how local authorities decide to use this money, provided it is used to address issues related to flooding in the community.

Speaking about the announcement of the awards, John Redwood said: “I welcome the £801,000 extra for Wokingham Borough Council and West Berkshire Council. It is a shame it has taken so long for this to be forthcoming, and unacceptable that almost a year after the floods there are still people who have not received the proper assurances that action has been taken to prevent a repeat of similar incidences in the future.”

“I hope both local authorities will now set out sensible schemes to help prevent future flooding. This must include a detailed breakdown of just who is responsible for each aspect of the flood defences, clearance and maintenance of the ditches and culverts, and an expansion of water capacity where this is sorely needed.”

Today two pieces of news are juxtaposed which should make supporters of democracy pause for thought.

In Zimbabwe we are told there is a chance that the dictator who lost the election may be about to sign an agreement with the Leader of the Opposition, offering some kind of sop to him whilst retaining the job of President. In the EU the French President acting as President of the EU Council has proposed that the irish No campaign, who won the referendum, should sit down and talk to the Yes campaign and government, who lost the referendum, about how to implement the Treaty the people rejected.

All kinds of bien savants tell us that the new African approach to democracy in Kenya and Zimbabwe offers hope for the future – a government which loses stays in power but agrees to offer the winning Opposition some enhanced role beneath the losing President who retains office. That is not democracy. Democracy says that the will of the majority prevails. Democracy means that if you lose an election you bow out gracefully, to lick your wounds and work out how to do better next time. Similarly democracy means that if a government tables a referendum and loses, it has to stick to the view of the majority. It is not entitled to carry on as if nothing had happened, or to threaten another referendum because it did not like the answer. Indeed, a decent government that lost a referendum on a substantial matter like the future of the country’s constitution would resign, appreciating it had lost the support of the public.

I am astounded that these Europeans seem to think the popular will as expressed in elections or referenda matters so little, and think that in each case people in power have a right to negotiate, spin and slither around any kind of popular rejection. I want to hear our government condemning the idea that in African countries it is just fine for losers to cling to power if they offer the winners a consolation prize, and I want them to tell the French President he is making the Irish situation worse from the EU point of view by interfering in a way which suggest the EU does not care a damn about the views of the public and is desperate to overturn the popular will as soon as possible.

When the Conservatives lost office in 1997 I understood the feelings of the public. I have never through the long years of Opposition thought we had any right to a share in the government, and never wanted to change or rig the electoral system in a way which would give us more chance of winning.

The role of Opposition is an important one in a democracy. A good opposition understands that, and works away first to be a good opposition then to be a plausible alternative government. A sensible elected government seeks to build a wider coalition of support than its own party, but always remembers it only governs through consent, and has to go once it has lost that consent. Those who seek to rewrite the rules for African countries and for the EU are not democrats. They are undermining the very basis of consent which is crucial to democratic government.

True democracy is not the tyranny of the majority so much as the accountability of the government to the majority, and the availability of an alternative to keep a government more honest and responsive.If the system no longer allows the alternative to take over or the popular view in a referendum to prevail, the system is dead.

During this second cold and wet summer in succession it is good to enjoy the occasional day of warm sunshine, and remember wistfully past summers which were so much hotter. At least I can blog more, because week-end games of cricket are being cancelled all too regularly owing to rain and bad light! This week I was in a game where we played on into the dark after 6.30 pm at considerable hazard to fielders.

It was against this background that I found the following comments of Dr David Evans, the author of the Australian carbon accounting model, most interesting:

“ The satellites that measure the world’s temperature all say that the warming trend ended in 2001, and that the temperature has dropped about 0.6 degrees in the past year….The world has spent $50 billion on global warming since 1990, and we have not found any actual evidence that carbon emissions cause global warming” (This first appeared in an article in the Australian)

I was also sent copy correspondence Christopher Monckton has been having with the American Physical Society over an article of his written for their Journal in July 2008. Apparently they commissioned him to write a piece claiming that the extent of the likely impact of human generated carbon dioxide on global temperature change is less than commonly thought. He tells me wrote it and that they asked for other professional opinion on it. He was therefore surprised to learn that they intended to place a disclaimer on the article saying “The following article has not undergone any scientific peer review. Its conclusions are in disagreement with the overwhelming opinion of the world scientific community. The Committee of the American Physical Society disagrees with this article’s conclusions”.

All this is looking very dated, as the world faces recession, credit crunch and downturn. In these circumstances there should be more opportunity to concentrate on practical greenery. Most could surely agree it makes sense to recycle and re-use more, to generate more power from sources other than oil and gas, to waste less fuel and raise the efficiency of everything from home heating to industrial production. All these things will help cut the costs of production, help price firms back into weak markets, and help householders reduce their bills.

There are two ways of going green. The UK government belongs to the tax them and regulate them camp. They have put taxes on petrol and owning cars, taxes on business and taxes on using city centre roads. They have with the EU written endless pages of new regulation. They have made the green cause unpopular, by seeing the opportunity it affords to introduce everything from more taxes to a spy on your rubbish bin. People feel robbed. They are nervous about whether they are conforming with the mass of new regulation bossing them around.

The alternative approach is to rely on incentives and new technology. At the end of the nineteenth century people were worrying about how to handle all the horse manure in London from the build up of horse drawn traffic. They did not foresee the technical revolution that the car and bus represented. It is going to be possible to cut the amount of carbon and of noxious gases emitted by engines to produce much greener motorised transport. It is going to be possible to generate more of our own power and capture more of our own water at home, and to insulate our homes to much higher standards. We know how to generate electricity without needing to burn oil or gas.

The best green policy the UK has enjoyed in recent years was the duty reduction on petrol to encourage people to switch from leaded to unleaded fuel. The modest tax incentive achieved the switch effortlessly and comparatively quickly, as people saw the need to cut lead in the atmosphere and liked the cut in their bills. We need more policies like that, to go with the grain of human nature, to cut our fuel use and to promote better technology.

The Conservative Policy Review warned that the removal of powers from the Bank of England could make it more likely a bank went under. It also pointed out that the fiscal rules were well and truly broken a year ago and suggested ways to remedy them:

2.1. Making the Bank of England Independent

The Chancellor’s early decision to make the Bank of England the independent judge of interest rates, with the creation of the Monetary Policy Committee, was an idea whose time had come. It has been welcomed by all political parties and the business community, and has combined with the effects of globalization to continue the relatively benign interest rate and inflation environment we have enjoyed since 1993. However, it is important to understand the limitations that the Government placed on the Bank’s independence; and we will recommend that, in contrast, a Conservative government takes action to strengthen the MPC still further. It is also important to understand that the first decade of a more independent MPC has coincided with a very favourable business and interest rate climate worldwide, and with easy money globally. It should be remembered that the Chancellor also took substantial powers away from the Bank, transferring banking regulation to the FSA and removing the Bank’s role in managing public debt.

(Commentary on benign climate and UK higehr rates) But there are two reasons for our performance still not rivalling the best of our international competitors, which relate to Government actions; and these need to be considered if we are to create an optimal mix of inflation and interest rates in the future.

The decision of the Chancellor in 2003 to change the Bank of England’s target rate of inflation. He replaced a 2.5% annual increase in prices as measured by the RPI with a 2% target as measured by the CPI (which typically rises by 1% per annum less). It is widely agreed that this led to a relaxation of anti-inflation policy at a crucial time. And its result can also be seen as further proof of the destabilization consequent upon attempts to bring fiscal policy in line with Europe’s; which was earlier seen in the deleterious effect of the ERM policy (which had Bank of England and all-party backing).

(ERM passage )
The second reason is the deterioration in the public accounts from 2001 onwards. After two years of following Conservative spending plans, with sensible and tight controls on public spending, repayment of borrowings and fiscal prudence, the Chancellor turned to a large increase in public spending. This resulted in substantial inflationary expenditure in the public sector, and large debt issuance. Money growth was strong, and the public finances worsened rapidly.

This has resulted in the Bank of England struggling to reduce inflation from a high of 4.8% on the RPI (3.1% on the CPI). It is being forced to tighten monetary policy, in an attempt to offset the impact of inflationary public spending, rapid money growth, and increases in public sector charges (in particular, postal prices and student fees).

In relation to this, we are also concerned about the appointment process for the MPC. The majority of its members are chosen by the Chancellor, who has at times failed to fill a vacancy promptly, and whose decision-making is opaque. We recommend that an incoming Conservative government should make this process a far more transparent one.

We are concerned about the division of responsibility between the FSA and the Bank over banking and market regulation. Fortunately, conditions in the last decade have been benign internationally, with no serious threats to banking liquidity. We think it would be safer if the Bank of England had responsibility for solvency regulation of UK-based banks, as well as having an overall duty to keep the system solvent. There could be important delays as information was exchanged between the two regulators if a banking crisis did hit, and there might be gaps in each regulator’s view of the banking sector at a crucial time when early regulatory action might spare a worse problem.

2.2. Recommendations on Economic Management

1. The Government should neither reintroduce exchange rate targeting into its monetary policy, nor enter the Euro: these are likely to prove destabilizing, and to reduce the UK’s competitiveness.

2. An independent MPC should continue to be supported in its role of controlling inflation through the setting of interest rates.

3. There should be further debate about whether the CPI is fully reflecting important inflationary pressures, including the cost of housing, and whether the Bank of England’s target needs reviewing.

4. The independence of the Bank from any external pressures should be buttressed further by introducing an open selection process, and formalizing the role of the Treasury Select Committee in scrutinizing appointments to the MPC.

5. Whenever possible, fiscal policy should support, rather than undermine, keeping both monetary supply and inflation under control.

2.3. The Fiscal Framework – and its Weakening Foundations

2.3.1. The State of the Public Finances

Under the Labour Government, there has been a rapid build up in debt, and official figures show the UK’s public sector net debt at £497.7 billion (April 2007). However, recent work by MPs and the Public Accounts Committee has revealed that the true extent of the UK’s public sector financial obligations is almost three times this stated amount. A report from the Centre of Policy Studies in 2006 itemised the following:

Stated net debt £487 billion
Public unfunded pension liabilities £720 billion
Local government unfunded pension liabilities £90 billion
PFI £25 billion
Network Rail guaranteed borrowing £18 billion
TOTAL public sector obligations £1,340 billion

Even these figures could be increased, however, if allowance were made for the possible failure of some PFI projects, with the consequent need for the Government to spend more on them; the current rapid growth of the public sector pay bill, and hence of pension liabilities; and probable further borrowing by Network Rail. (Estimate raised to £1.5trillion on Northern Rock nationalisation)

PFIs, in particular, are misleadingly valued in the public accounts. In July 2003, the capital value of PFI projects was included as £20 billion on the Government’s balance sheet. And yet payments due under those contracts amount to £138 billion over the next twenty-five years (from 2005/6). It is also worth noting that there are many PFI contracts entered into by local government, which do not appear in these figures at all.

2.3.2. The Fiscal Rules – Flexible Friends?

Two fiscal rules were established by the Chancellor, to reassure those who remembered previous Labour Governments’ economic mismanagement that this time things would be different. The Golden Rule required that the current budget should not be in deficit over the cycle as a whole; and the Sustainable Investment Rule required that public sector net debt should not exceed 40% of GDP.

In the early years, this framework worked well, as the Chancellor effectively followed Conservative spending plans. The Government repaid debt and ran surpluses. However, this has all changed in recent years. Public spending has expanded rapidly, which has plunged the country into large annual deficits.

As a result, the Chancellor has been able to remain within the Golden Rule only by changing the years of the cycle; and similarly, he has remained under the Sustainable Investment ceiling only by keeping many public sector borrowings, and unfunded liabilities, off the official balance sheet. This willingness to undermine his own rules, and to exercise such flexibility within apparently sensible and tight controls, has damaged both his credibility, and the Government’s reputation for financial management.

This is a pity, since we agree with the principles that initially formed the basis of the Chancellor’s fiscal framework. We believe that governments should not as a rule borrow to pay for current spending; but instead should run healthy current account surpluses in the good years of an economic cycle, so that some latitude is possible in the weaker years. We also believe that there should be a limit on the total borrowings of the public sector as a percentage of national income, both to reduce any crowding out of private investment, and to preserve a good sovereign risk rating on world credit markets. The common theme here is that borrowing is simply deferred taxation, which ultimately will have to be repaid by taxpayers, with interest.

2.3.3. Public Capital Expenditure – Sustainable Investment Rule Proposals

The distinction between current and capital spending is clear. Daily expenditure on wages and supplies, for example in the education and health services, is recorded as current spending in the public accounts. In contrast, the construction of a school or new hospital ward is recorded as capital spending or investment: items that will be available for a period of years, once the initial sum has been spent.

The contrast between public and private capital spending is, however, an added complication. In the private sector, a company invests to produce a future return; if that return is inadequate, the investment has to be written off. If the investment is sufficiently large and badly judged, it might, in extreme circumstances, even lead to that company’s bankruptcy. As most private investment yields a return higher than the cost of borrowing, it is usually appropriate to borrow some, or even most, of the money to make that investment, increasing both risks and rewards for shareholders. So, for example, a car manufacturer might borrow to invest in a new factory, in the belief that he can then make and sell extra cars; this extra revenue will then bring in sufficient cash flow to pay both the extra cost of his new factory, and the interest on his loan.

Much public sector investment spending, however, does not generate such useful additional revenues, and hence there can be no automatic assumption that an investment can be afforded on these grounds. If a local Education Authority spends capital on a new school, there will be extra costs in future years, but no extra revenues. Staff will have to be paid to maintain, clean and staff the school, but the service that it provides is of course free. The only possibility of extra revenue is if the school is due a government grant under the education funding formula, for example if it is to cater for extra pupils.

All of this requires careful management, as there is no market test for many of the capital projects a government will want to carry out. We believe that a new government will need a revised framework for capital spending, to ensure a sensible balance between the need to control spending, and the need to make enough money available to upgrade and expand public facilities in core areas like health and education.

We therefore propose that an incoming government should consider adjusting the Sustainable Investment Rule to:

1. Include guaranteed borrowings (such as those of Network Rail) in the calculation of public borrowings.

2. Include a more meaningful figure, to be settled by the NAO, for public sector liabilities under PFI and PPP contracts.

3. Adjust the limit on state borrowing to take these changes into account.

4. Continue to exclude public sector unfunded pensions liabilities from calculations of debt for the purposes of the Sustainable Investment Rule. Instead, they should be represented openly on a restated, and more accurate, government balance sheet.

5. Value government assets such as schools and hospitals on a ‘replacement cost minus assessed depreciation’ basis, in order to take into account their state of repair and fitness for purpose.

These adjustments should be made to reflect existing liabilities and should not lead to any loosening of fiscal control. In addition, we need to make it easier to decide sensibly the priorities for the limited supply of public capital. We believe that the best way to mitigate this capital scarcity is to allow worthwhile and appropriate infrastructure projects to take place in the private sector, for which there will always be (in normal conditions) readily available capital. This approach, adopted for most capital investment in a free enterprise society, can be applied to the following types of investment, which, in the UK, have typically taken place in the public sector:

There was one really encouraging thing in the Chancellor’s remarks to the Times. He thinks oil prices will remain high. As he’s been wrong on practically everything else, that is very encouraging! It is possible the big falls in the oil price this week will trigger further declines and some unwinding of the substantial “investment” positions that many funds have taken in oil. That would help relieve the immediate inflationary pressures, and might persuade eventually even the slow moving Monetary Policy Committee that it should fight recession rather than inflation. The long term trend in oil and other commodity prices is up, but that does not mean it will happen in straight line with no periods of weakness and decline. World demand growth is reducing, and even China and India are having to cool their economies to combat inflation.

It is also good news that at last the Chancellor recognises that he has been too optimistic about the state of the economy, about the likely pace of economic growth and the state of the public finances. Unfortunately he still seems to think in Labour soundbites and seems incapable of proper analysis of the situation.

He tells his colleagues through the pages of the Times that there will be no more money for “schools, hospitals, defence”. What does that mean, and why put it like that? The budget figures for 2009-10 and 2010-11 show more money for all three, especially the first two. Defence is in great need of additional money for equipment. There is plenty of extra money washing around in the budget estimates for the next two years in programmes without the same priority, which should be switched to the important and sensitive areas. There are huge amounts of over administration, over regulation, over computerisation, and over provision of consultancies which should be flushed out. That would free money for priorities, and allow cuts in overall spending. Non front line staff costs should be brought down through a strict policy of no recruitment.

The Chancellor needs to wake up to the bleak reality of a large budget deficit and borrowing overshoot which will prove difficult to finance and will be damaging to the rest of the economy. If he persists in continuing with so much wasteful spending in the public sector it will squeeze the private sector even more. That will produce more political misery for him amongst the voters he is squeezing, and will induce more job losses in private sector companies who will have to cut costs the painful way because the public sector is unable or unwilling to cut its costs in less painful ways.

The huge surge in borrowing in the last quarter took most commentators by surprise. My forecast of a £10 billion overshoot this year now looks quite low. The public finances are deteriorating more rapidly than I have ever seen, and still the government carries on spending as if there were no problem. The Chancellor talks tough – and foolishly – in the Times interview. Who believes him? The best thing is to watch what he does, not what he says. In the last few weeks he has spent an additional £2.7 billion on the 10 p tax rise compensation, (and promised more to come), £1.5 billion on North West transport, an unspecified amount on Northern Ireland for the 42 day vote, £4 billion over several years for two new aircraft carriers (work for Scotland) and hinted that he will raise less in revenue for fuel duty and car tax than planned. That is hardly evidence of a man with an iron grip on spending, or with a clear sense of direction on taxation. This budget deficit problem is going to get a lot worse and will need additional measures to control it. Borrowing is just deferred tax with interest! The public doesn’t want a bigger collective mortgage.

Meanwhile the commentators write about the breaking of the fiscal rules as if it were sudden and new. Any sensible commentator can tell you the rules were broken years ago by fiddling the figures.

Yesterday the BBC did move from ignoring the idea of cutting public spending, to mentioning it in pejorative terms. At the same time they started pushing out the government propoganda that the UK exceeding the 40% limit on government borrowing should be viewed alongside Italy where government borrowing is 100% of GDP and France where it is 50%. It’s typical of the lazy or biased reporting we get used to from the BBC on the economy and this government.

Of course the BBC should report the government’s spin line, but it should not be presented as fact. They could, for example, have said the following:

“The government today sought to reassure that raising the ceiling for public borrowing above 40% was reasonable at a time of slow down, especially as France has already reached 50% of National Income and Italy 100%. The Conservative’s Economic Policy Review pointed out that in their view the government has exceeded the stated target for public borrowing if you include all the off balance sheet loans and the unfunded pension liabilities, and put the total already at around the Italian level of 100%. City expert Mr X said he would not himself chose to compare the UK with Italy, a slow growth economy in considerable trouble, and said that the faster growing economies tend to be ones with lower levels of public spending and borrowing as a proportion of National Income than the UK”

That would be a better balanced piece, and leaves the listener free to decide the government is right or the Oppositon is right or business is right, or some combination of them.
It is a disgrace that they just assert the government’s spin line as true and sufficient.

It is all part of the systematic misrepresentaiton of economic matters. This includes:

1. Telling people that the only option for Northern Rock was nationalisation, without setting out other options that were available prior to that dreadful decision. Nor did they expalin that nationalisation was the option that made the mortgage position worse and would lead to more redundancies at the Rock.
2. Telling people the Bank of England is independent, when it was badly damaged and its powers reduced by the Brown reforms.
3. Equating cutting public spending with cutting schools and hospitals or teachers and nurses - ignoring all the wasteful and less desirable spending the government carries out.
4. Concentrating on so called “new money” in arguments about public spending, which implies that the only money that matters is additional spending over and above the additonal spending that has already been announced!
5. Believing that spending less means doing things less well - no understanding of productivity and the favourable impact of new technology on costs and quality.

I woudl be happy to set all this out on the BBC anytime this week-end but am not expecting to be asked. They usually ask me to go on to talk about topics I know less about and never write about!

Halve interest rates. Cut out waste and undesirable public spending. Sell some public sector assets to raise cash.

The government should do all three if it is serious about preventing recession or recovering from the downturn.

Money is too tight and interest rates too high, just as money was far too loose and interest rates too low for too long in the period 2001-6. The current inflation comes from past mistakes, and will subside as soon as world commodity and energy prices subside, which they may well do.

Even today, if the government imposed a staff freeze (excluding essential front line service employees like teachers, nurses, police, doctors and service personnel) the costs would run off quite quickly given the huge size of administrative payrolls. It should also place a ban on most new consultancy contracts, cut down numbers of political and press advisers, and slow down or cancel expensive computer schemes, especially the ID one. It would not be difficult to save billions over the next year or so.

Asset sales would also help the public accounts at a time when they are strapped for cash. Let’s see the sale of the Student Loan book accelerated. Bring on the sale of Northern Rock. Insist on more private capital for the railways.

There are many things the government could do to get a grip on its finances. Being a government of spinners, all it will do is change the basis for setting out the borrowing figures and the fiscal rules, and carry on borrowing as if there were not repayment day. That will prevent the Bank cutting interest rates as much as possible, and will intensify the squeeze on the rest of us. The UK is the worst placed of the major economies to ride out the Credit Crunch, because its own economic policy is so appallingly badly run.

Of only we could have some action to fight recession, instead of wonky words and fiddled figures.

After the fiddled figures comes the changed rules. For years we have been served up a diet of changed statistics, altered bases for setting out public spending, a riot of off balance sheet disguises for extra borrowing, and changes in the dates of the famous cycle that is meant to anchor the government’s spending controls. Despite all that we learn today that even the government think their so called fiscal rules lack credibility, so we are to have new ones that allow the government to carry on borrowing as if there were no day of repayment.

“Fiscal rules lacking credibility” is a smart way of saying no-one believes them any more. No wonder. I have set out how I think the true balance sheet indebtedness of the UK government including unfunded pension liabilities is around £1500 billion, or more than 100% of our National Income. To be told we are still just below 40% of National Income on the government’s measure, staying within this control, is absurd. If the government wants to have a control over total debt it should include the borrowings of Northern Rock, Network rail, all the PFIs and PPPs, even if still refuses to include the pensions deficits that any private sector company now has to put on its balance sheet. That alone would mean they would need a debt ceiling above 50% of National Income unless they are going to start cutting their debt burden..

Then there is the sustainable investment rule, which says they should not borrow more than they need to pay for capital items across the cycle. This allows them to borrow for current spending – to live on overdraft – for years on end, as the cycle may last 12 years and is their flexible friend. They only tell you when the cycle ends when they feel like it and after it has happened! A better rule would be to limit borrowing to capital and a specified percentage for current spending if economic growth falls below a stated level, and to require proportionately less borrowing than capital spend when economic growth exceeds the same level, which should be set at the trend or average rate of growth.

What matters today is not efforts to change the rules, but efforts to control spending and borrowing more effectively. This week I was sent a note telling me that work is advancing on having more honest, understandable and consistent figures for public spending after all these years of fiddled figures. I emailed back with the ironic enquiry that I assumed this work would not be ready until the 2010-11 financial year, just in time for a new government if one is elected. Quick as a flash I was emailed back to tell me that was exactly the expected date of introduction! I just trust the sender shared my sense of irony. Clearly some are preparing for a new government, and think it should not have access to the flexible presentation of the current regime.

This morning I awoke to the BBC telling us there are just two choices for the government - relax the rules on borrowing (i.e. borrow more) or put up taxes.
What is with these so called independent journalists?
Why is cutting public sector waste and undesirable spending never an option for them?
How much more waste and needless spending do we have to have before it might just be?