The Emmbrook School and the Willink were the winners of the semi-final of the Wokingham Schools’ Debating Competition, held last week on Thursday the 20th November at Wokingham Town Hall.

In a series of lively debates chaired by the Rt. Hon John Redwood MP, who organises the competition for local schools every year, Adam Connell and Florence Curtis of the Emmbrook and Lawrence Hill and Dominic Murray-Vaughan of the Willink scored victories over their opponents from St. Crispin’s and the Holt School. They will now proceed to the final round, held this Friday the 28th November in Wokingham Town Hall at 7pm, to battle it out for the John Redwood Cup and a chance to visit the Houses of Parliament.

The motion that will be debated this Friday is “This House believes the Government has created the Credit Crunch”, a very topical subject with the economy being so high on the political agenda.

The winning team will receive the John Redwood Cup for their school, which will also receive an overhead projector donated by 3M. Both teams will also get the opportunity to have lunch with John Redwood in the House of Commons next year and see Prime Minister’s Questions from the viewing gallery. All participants will receive certificates and small prizes from the House of Commons gift shop at a prize giving ceremony held after the final round on Friday.

Speaking about the semi-final, John Redwood said: “Once again the quality of debate was very high. All the teams had obviously put a great deal of effort into preparing their arguments, and they also showed an ability to think on their feet and respond well to the cases made by their opponents”.

“These are valuable life skills and I am glad to be able to give Wokingham pupils the chance to hone these by organising the competition, which is very popular amongst all the participants”.

For more information please contact Carl Thomson on 020 7219 4205, and for photographs of the participating pupils (for media purposes only), please contact Christine Hill on 0118 962 9501

My concern about the UK economy has centred around the large banking sector relative to National Income and tax revenue, the large consumer deficit, and the growing government deficit. I have felt the government has been running too much financial risk, whilst the economy itself will enter a period of no growth followed by relatively slow growth.

All this seems to be endorsed by the government’s own heavily revised forecasts, published yesterday. They foresee growth for 2008 at 0.75%, with falls in quarters 3 and 4, followed by a fall of 1% next year, and growth of 1.75% in 2010.
Private sector forecasters are likely to see this as optimistic, with more fearing a continuation of the downturn beyond the second quarter of 2009. The UK’s growth in the last decade owed a lot to the success of banking, property, financial and business services, areas which are entering difficult times.

The government’s own finances are deteriorating sharply. The Chancellor told us he planned to borrow £78 billion this year compared with the last Budget forecast of £43 billion. The back of the new Forecast book shows that when the bank share buying and other financial transactions are taken into account, his cash requirement from markets and National Savings amounts to £157.7 billion. This will be followed by borrowing well over £100 billion the following year. This will be a big burden on the UK gilt market, even allowing for the demand from pension funds. Much of it will be borrowed for relatively short periods, leaving a refinancing hump early in the next decade. The trajectory for getting things under control again is long and leisurely, with the current budget not reaching balance until 2015-16.

How has he got into such a position? There are three main reasons, The biggest increase in borrowing comes to buy bank shares and nationalise smaller banks. I have been using the figure of £58 billion for 2008-9 for this programme. For the first time the government sets out more detail. Their current estimate for this year is now £69 billion. Apparently there is a £5.7 billion working capital facility for Bradford and Bingley, and £8.1 billion for the Icelandic banks to add to the amounts in my figures, whilst the government figures do not appear to include the extra share capital for Northern Rock as this was a transfer from lending to them. We agree about the £37 billion for the three banks in the share buying programme and the £18.2 billion paid to Abbey for Bradord and Bingley.

The second biggest change is the collapse of tax revenues. This year they anticipate a revenue fall of £30 billion, to be followed by a huge dip of ££64 billion next year excluding the policy change on VAT.

The third change is a series of policy alterations in favour of more spending and lower taxes. The £8.6 billion next year off VAT is the largest.

The figures reveal too much financial risk and too much borrowing. The government is now in the hands of the money lenders. It was once famously said “We do not own the nationalised industries, they own us”. The government will have to learn that lesson all over again with its expensive habit of buying banks.

Borrow, borrow, and borrow again. The government is living in a fantasy world, where foreign investors and rich British people have to lend to the government to spend like there was no tomorrow. Their political strategy seems geared to a Spring 2009 election which they will back away from when they see the opinion polls, after a winter of job losses and factory closures.

This government will drown in a sea of red ink. Never have I seen the public accounts in such dire straights. The government assumes a mild and short recession, with recovery beginning in the middle of next year. Even so, they anticipate tax revenues plunging by a massive £73 billion in 2009-10 because the economy will be weak, and anticipate borrowing £157 billion this year and £126 billion next year. This year’s borrowing including buying bank shares amounts to more than 10% of national income. If they turn out to be too optimsitic in their forecasts , it will be worse.

The Opposition talks of the government flashing the national credit card. They are also taking out a huge national mortgage, and will soon have us deep into negative equity, unable to pay the interest bill easily.

If this were a company it would be time for the Non executive Directors to have strong private words with the Chief Executive. They would tell him or her that the strategy was taking the company quickly to a position where it could not afford the interest and all the other bills. They would demand cost cuts and raising more revenue. They would warn that if the company did not do it for itself, the bank manager would take over or eventually the Administrator would be called in by the creditors to do it. It is time for the rest of the Cabinet to warn the PM and Chancellor in private, and time for Parliament to raise the roof beams, warning this government there are limits to how much a country can borrow.

Labour’s crude political strategy is to say they will take care of the victims of recession through spending more public money, whilst the Opposition just wants spending cuts. Please do us a favour. The Opposition welcomes – and urges – action to ease the plight of the victims of recession. We have asked for schemes to help small business struggling to pay the bills, to help Council taxpayers faced with another large public sector demand, and pensioners. More can and should be done. What we cannot afford is the VAT cut, the bank nationalisation, the ID cards, the unelected regional government, the public sector’s rich list, the surveillance society and all the panoply of Labour’s illiberal state.

As I have commented before, what we really can’t afford on top is a long and deep recession. That is why yesterday was such a wasted opportunity. Sensible action to improve the terms of the bank support in a way which cut taxpayer risk and made it more effective would have helped. Tax cuts of the right kind to target money to the lower paid would have helped. Tax cuts for business struggling with insufficient cashflow and restricted borrowing would help. Instead Crash Gordon went for broke with a VAT cut which will do little good, and could be the final weight which pushes this government under in the sea of red ink it has created.

Tradition has it that immediately following a Budget statement the Commons gets to vote on urgent tax changes, and then proceeds to a debate extending over several days to go in to all the detail of the Budget.

Today we has a so called Pre Budget Report, which warrants a Ministerial statement followed by a few questions from those MPs that manage to get called. Yet today’s PBR was in effect a huge Budget. The Chancellor plans a large urgent tax change on VAT.

I and three other Conservatives in the Chamber asked for a debate and a vote on all this. We were told there were no plans for one today, as the government had other business. We will return to this matter, as it is a democratic disgrace.

According to the Pre Budget book the revenue loss next year, 2009-10, will be a stunning £72.7 billion. £8.6 billion of that is the policy change on VAT. The rest is the impact of the recession on Stamp Duty, NIC, Income Tax, Corporation Tax and the rest.

The borrowing this year was said by the Chancellor to have almost doubled to £78 billion. This figure left out buying bank shares and other expensive financial transactions. At the back of the Budget book it tells us the “Net financing requirement” is an astonishing £157.7 billion for just the current year. The Gilt market is going to be working overtime to try to supply all this money.

I was forecasting £140 billion (my £120 billion forecast plus the £20 billion budget packages). Gilt redemptions and other items take it over that to nearly £160 billion. The Treasury is gloomier than I have been about the outlook for revenue, given the downturn.

Do you remember Gordon Brown on coming to power telling us he would take Parliament more seriously and make it the centre of our political life? Ministers would report first, and fully to Parliament. So this weekend the government was busily leaking all the contents of the Pre Budget Report and the media were lapping it up. I will of course go in today to hear it in Parliament as well, but it does take much of the point away when it has been the subject of media debate for twenty four hours beforehand, and when I have been able to get my views across about it on the media before the Chancellor rises.

Meanwhile a more gripping drama was unfolding in the USA. Paulson’s much battered and changed bank bail out plan had to be modified again to handle a real crisis for Citibank. They ended up both buying some equity in the institution and guranteeing loans. On both sides of the Atlantic mega plans to spend $700 billion (£570 billion) and £487 billion to prop up banks have been on ice owing to problems with their design. This week-end reality caught up with the USA with the need to do something to help a mega bank which would otherwise damage the system.

In the USA too there are long debates about whether, when and how much money to give to the US car industry. Is it a bellweather for corporate USA still? Is the gas guzzling US car an icon worthy of state preservation? More importantly, how serious was President elect Obama when he implied his magic wand could be waved to help keep the jobs? If they debate for too long there could be car makers going into Chaper 11. Reading some of their balance sheets does not reassure.

In the UK this week-end it was the turn of bankers and shareholders to pour over the plight of Woolworths. The Credit Crunch has come back to the High Street, after its earlier visits in the form of the run on the Rock and the refinancing of MFI.

Citibank, Woolworths, the car makers all in one weekend show just how big this crisis is and how so far government remedies have not worked, or even started to work. In the 1974 world oil crisis the bankruptcy of Burmah Oil in the UK was a huge event. Once that had passed the market sensed the worse was over and a long slow process of recovery began. Secondary banks were nursed through the crisis by intelligent Central banking, until they could be disposed of or dispensed with. They were not nationalised in the meantime. One large bank was in difficulties but all the talks and actions took place behind closed doors and no long term public money was committed to seeing it through.

This time the crisis is much bigger, and the action of the authorities so far much less adept at containing the damage. So what should Mr Darling do today?

He could begin by apologising for the leaks. He could surprise us by doing something better than the VAT cut. He is right to delay his increase in profits tax on small business and the extra Vehicle Excise duty on cars we already own – better still just to cancel those proposals.

He should say that nothing is going to work to reflate the economy unless the banks work. Instead of lecturing them and threatening them with legislation to make them lend he should revisit his huge £487 billion bank package. He should ask why it is not being taken up, and should seek to find ways to guarantee, supply liquidity and offer short term loans so the banks can lend to each other and to customers again. It is no good getting bored with the banks package and moving on to a general reflationary package. It reinforces the impression that this whole thing is just one great spin exercise to show the “governemnt is on our side in difficult times”. What the public wants is a government who knows how to get us out of the difficult times they led us into. That requires understanding, patience and perseverance to get through it all.

The idea of legislating to force the banks to lend is bizarre. How would that be phrased? Do they have to lend to anyone who fancies borrowing, whatever their income and security? Or do they start laying down in law details of how a bank should assess a customer for a loan? How do they protect the banks (for they will be owning some of them) from customers who manage to meet the criteria in the law on Day One but soon change their circumstances once the loan is obtained? How do the courts deal with genuine differences of interpretation of the loan rules?

One of my contributors says that the difference between myself and the government is that I like bankers. My answer to that is I like some bankers. I do not condemn any group as a whole – there are some good estate agents and politicians, and there are a few bad doctors. More importantly I recognise that we need bankers, as they create and destroy money by the attitude they take to new and old lending. If they are contracting their businesses and being tough, it means the authorities have set the wrong framework of regulation and interest rates, as bankers like most business people are natural optimists who would rather exapnd their businesses. That is why Mr Darling must go back to the drawing board and revisit the capital adequacy framework, the interest rates and the support package for the banks. In that lies the answer to the Credit Crunch, not in the level of VAT.

Just about the worst tax cut they could design is a VAT cut. It’s costly on the revenue, but will have little impact on the problem. People do not feel well off. Offering them 2.5% off dearer items at a time when the shop and showroom prices are already 10-20% down is not going to do much.

It’s not fair on the poor. Essentials that make up most of the budgets of the lower paid are already VAT free. The biggest gains will be for those who buy expensive wines, flashy cars and use lots of petrol. If markets do not like the borrowing figures we will lose more from the higher long term rates of interest the markets will demand of the government.

An income tax cut on low incomes would do a lot more good, giving people more cash in hand to pay off the credit card and Hire Purchase money they owe and handle the bills for the basics that are overwhelming them. Far from showing the government is in touch or in charge, a VAT cut shows just how far they have lost the plot. Whilst any tax cut is better than none, too big a cut in the wrong tax is not going to solve anything.

To:Prime Minister
From Political Adviser

I am writing today because your political strategy runs the risk of being undermined by events.

Of course you are good at crafting an economic policy to make it as difficult as possible for the Tories. It was one of your best victory rolls, after all those years of condemning some Tories for wanting tax cuts, to go for broke by offering tax cuts the Tories cannot match because of the financial position. Following this up by making public spending plans much tighter for the years after the election, and warning of tax increases then too, puts the Tories into a bind which the BBC will try to tighten round their necks. We can get the interviewers to taunt the Tories, asking them, if they will really cut spending by more than the figures we are proposing, and asking them which taxes they will increase to cut the deficit after a year or so of our extra spending and borrowing.

You should be aware, however, that some of the Tories are no longer playing that game. There might be some salvation for them by pointing to the need for restraint and tough decisions, if the policy we are following does not start soon to fire some economic recovery. They can concentrate their fire on the repossessions, the job losses, the large borrowing figures, and any weakness in sterling and bond markets that we experience from here. Events do matter, and sometimes events can overwhelm the best political strategy or the most successful spin.

I know you now have two brilliant spin doctors on board and making a difference. I think you have done a great job getting attention to yourself and getting people to change their image of you. However, the image of crisis leader will only be sustainable if there are signs that the crisis is passing.

The crisis has two related characteristics. There is the banking collapse, and then the deep problems in the rest of the economy. Unless we can sort out the banks, we cannot recover the rest of the economy. If the banks cannot or will not lend to the everyone else, we will see many more business failures and job losses.

You set out a three part programme for dealing with the banks. The main money was to be committed by short term loans and guarantees. Apparently little of this has happened. You need to revisit the terms, as the banks will need this money and help to start them lending again. The third part, the bank share purchases, is very popular with our left wing, but will mean increasing pressure on you, and blame, if the nationalised banks have to repossess and are unwilling to lend to all and sundry. We are also losing lots of money on the shares. You need to reconsider this part of the deal as well.

You are now proposing a reflationary package. It will not work until the banks are fixed. The banks are the mechanism by which the reflationary money circulates and multiplies, to create and maintain jobs and businesses. It would be better to fix the banks before overcommitting. Markets can be spooked by a government which wants to borrow too much. The more long term support you give the banks the more you need to borrow anyway, so there is the danger of overload.

You have put a lot of political capital into your plans for rebuilding the banks. You also need to help do this to get the economy going again. Please have another look, as the current programme is not working. The spin was great. The reality is undermining it. There will be no recovery until you really fix the banks, however much you borrow. And whilst it hurts me to say so, the Tories are right when they say there are limits to how much you can borrow, given the commitments you are taking on for the taxpayer.

This morning the Today programme kept repeating that the Conservatives have done a U turn on public spending.
Instead what they did was do exactly what they promised – agree to Labour spending up to 2009, and then review it. They have now reviewed it and decided spending has to be lower than Labour plans thereafter – and rightly so.
We were also told the Conservatives do not know what to do about the banking crisis – yet I heard them say, again rightly, the government needs to change the terms of its massive bail out package, because it is not working.

On September 13th 2007 I posted a blog which was very critical of the Chancellor’s important remarks on banking. Mr Darling told us:

“Institutions have in some cases been prepared to lend to people without checking if they were ever going to repay it”
“Institutions themselves need to open their eyes and be more honest”
There needed to be a return to “good old fashioned banking”

This “Moral hazard speech” lasted just one day. Having warned banks there would be no bail out where they had made lending mistakes, the following day he began to go to the aid of Northern Rock.

This week Mr Darling has told the banks they must lend more to small business, or else.
Does that mean they should no longer consider if the businesses can repay it? Does it entail closing their eyes and lending regardless? What if they honestly think the small business concerned cannot get through the recession because it has too little revenue coming in?

Is this a case of different conduct for a nationalised bank from a private sector one? Do private sector banks still have to obey the dictats of the Moral hazard speech, and nationalised ones the requirement to lend regardless? Or has the latest requirement replaced the enthusiasm for good old fashioned banking?

As someone who does want the banks to help small businesses as much as possible, I understand they can only do so on a big enough scale if the government is more successful in offeirng the prospect of recovery from recession. The government faces a dilemma. If it does not start to lift us out of recession, lending too much to people and companies who cannot repay just weakens the banks more rather than saving the businesses we want to save. Weak banks and weak small businesses both need the same thing – more success from the economic policy.

For months I have been saying interest rates need to come down to 2-3%. The authorities now seem to agree.

For months I have also been saying our public deficit is too high and rising too fast, and needs to be controlled if we cut interest rates to stimulate the economy.

Now the Treasury agrees with the first part of that forecast. I have been using £120 billion as the borrowing figure for 2008-9. The Treasury is now preparing us for a figure above £100 billion on Monday when they announce their new forecasts, followed by another high figure for 2009-10.

Let’s hope they soon get the third message. Borrowing needs to be at a sensible level, to sustain the lower interest rates we need. If they do not show a convincing path to modest levels of borrowing, they will find it increasingly difficult to borrow all the money at a sensible rate, and could feel more strain on the currency.

The quickest and easiest way of controlling borrowing would be to change the way they support banks, and to sell some of the banking assets they already own.

NO
Indeed, No, No, No.

I am surprised that some of the people writing into this site think joining the Euro might now be a good idea.

When Euromania was at its height I wrote a book entitled “Just say No”. It set out 100 reasons why abolishing sterling would be a bad idea, for the EU as well as for the UK.

From the UK point of view it will always be a bad idea, for all those of us who want to keep a democracy in these islands. The electorate needs to be able to appoint and sack the people who make the big decisions which affect our economic well being. That includes keeping our own power to determine interest rates, how much currency is in circulation, and our budget deficit or surplus.The fact that our governemnt has been making a mess of using those powers should not dim our belief in keeping them here, under democratic control.

The UK economy is too big, and too dependent on global trade and dollar business, to be a comfortable part of the Eurozone. Whereas today some of the strain on the economy can be taken by changes in the exchange rate, were we to join the Euro more of the strains would be taken in lost jobs and lost investment.

In order to join the Euro, a country is meant to keep its currency stable against the Euro for a period of years to show it has converged with the others. Sterling has moved from 71p to the Euro, to 60p to the Euro to 83p to the Euro now – wide fluctuations showing our economy has not converged, and is not about to. Our miserable experience in the Exchange Rate Mechanism showed how much damage to jobs and asset values pretending we had converged could cost. Why do that again?

A country also needs to keep its deficit down to a maximum of 3% of National Income. Our Treasury is now forecasting an eye watering 8% of National Income. Whilst I would like our deficit to be reduced, slashing it from 8% to 3% would be too far too fast requiring in the short term crippling tax rises as well as spending cuts in a way which could damage the economy further.

Euroland would be foolish to want the UK in at any price. Just as the UK destablised and then wrecked the Exchange Rate Mechanism, so in this condition we could damage the Euro. Euroland is already struggling to discipline or live with the excesses of Italian, Spanish and Greek economic policy. Incorporating sterling would be a bridge too far, and would end in disaster.

This week has been a bad one for the government as investor in bank shares. If they go ahead with their purchases of HBOS and RBS, taxpayers will be sitting on an immediate loss in excess of £8 billion.
At a time when money is scarce and people are overtaxed, is this a good idea? Why not support the banks in a cheaper and less risky way?
Shouldn’t the PAC open an enquiry into this use of public funds?

We now know that the strategy behind Northern Rock was to wind much of it up at taxpayers expense. Their mortgage outstanding lending is falling rapidly.The government probably wants to have something left for the General Election, and is telling North Eastern MPs and their constituents that the nationalised company will still make payments to the North East in the meantime. I have never understood why they wanted to manage this run down, and have always felt it would cost taxpayers substantial sums. I do not expect to see our £3 billion of share capital back.

RBS is a very different matter. The Labour party rightly sees this as a going concern. There is now an argument about what to do with it.

In the capitalist corner are those who say the government should help the bank get back into healthy profit as quickly as possible, and then sell the shares on to the private sector, making a profit for taxpayers. They favour changing the terms of the current offer, to make it easier for RBS management to pay for the capital, and easier for them to make good profits. They accept the City argument that 12% interest on the Prefs is too high in the current climate.They believe the goverment should not appoint Directors, and should stay at arms length.

In the socialist corner, they take a very different view. They see nationalisation as an opportunity to change banking, curbing the excesses of the private sector. They favour government Directors. They want the government to limit salaries and bonuses for senior people, urge increasing certain kinds of lending that they think are needed in the economy and propose lower fees, charges and interest rates for preferred account holders and borrowers like people on low incomes and small businesses. They favour banking with a conscience or a social purpose.

Both groups share the heroic assumption that the nationalised banks have been through the worst. They are discussing how to share or spend the proceeds of success following cheap purchase of the shares.

The market is offering a different warning. RBS shares trade well below the government’s proposed purchase price. If the market thought the government capitalists were right and would prevail, investors would be buying the shares at least up to the goverment price so they could enjoy the ride and profit alongside taxpayers. Either they think the government will require too many social policies from its bank, or they fear that the underlying financial position of the bank is worse than the government optimists believe.

What could go wrong for the goverment capitalists? The banks have admitted substantial losses on mortgage lending, but house prices are still falling and mortgage lending experience could deteriorate further. As more lose their jobs so more people will find it difficult to pay the mortgage. The banks have not yet written much off their corporate lending. This winter will see a big deterioration in the financial position of many companies. More bank write offs here are likely. The security banks have taken for many loans, based on property or shares, is being undermined by the day. Any prudent buyer of bank shares would do a lot of due diligence on loan books before commitment, and would apply a discount to the current assets to allow for more hostile conditions ahead. The government has done none of this.

Nor should we assume the capitalists in the government will have it all their own way. Whilst PM and Chancellor are mainly in the capitalist camp along with other Treasury Ministers, they are politicians wanting to do well in an election. They may seek behind the scenes to get the nationalised banks to lend more, to go easy on certain fees and charges, and take certain social matters into account. There will be limits to how much pain these politicians will take in the case of defending well paid bankers saying No to too many people and businesses.

The more I look at it, the more I conclude the government in its own political interest, let alone the country’s economic interest, should renegotiate its package of bank support. It needs to stand behind the main banks, but it does not need to buy such large shareholdigs at the proposed prices. The risks are simply too great. The banking crisis did not end with the announcement of government cash for shares. It simply entered a new and worrying phase, where the taxpayer is too much on risk, and the government faces nasty political dilemmas aout how to run these huge organisations. It is cheaper and less risky to support banks by short term loans and guarantees for which the banks pay a fee or charge.

I heard Ian Pearson speak last night. He like many Labour Ministers read out a script which told us he felt our pain. He told us we were going into recession. He then told us that the 3 point Brown plan was the answer to our banking woes. If only!

Appartently they have three aims from their international jet setting. To get agreement to more transparency, to get agreement to more capital adequacy for banks, and to reform the rating Agencies. Thud, thud, thud. That was stable doors you heard. No, there are no horses left, but worry not. The taxpayer will still pay the wages of the stable regulator.

Increased transparency is usually a good thing. It also normally means marking to market the values of everything a bank or other financial insitution owns. In the current situation where there are no effective markets for many of these assets, that is hardly likely to bring back confidence. The Minister did not bother his financial audience with the interesting discussion we are told Ministers are having about whether to suspend some elements of mark to market pending the re creation of proper markets in these instruments. They dither whilst the credit arteries of the nation seize.

Requiring sensible amounts of capital from banks is also a good thing. It is a pity the world’s regulators did not do this in the good times, when they were lax in their requirements. Demanding more capital now is deflationary. The UK government wiped out any benefit of its £37 billion new share capital for the banks by lifting the amount of capital they want the banks to have for their current level of lending. Further moves world wide to increase banking capital requirements will mean more banks seeking the repayment of more loans, and unable to make new loans available.

The Minister assured us “The age of irresponsible credit is over”. He did not say sorry for this passing age, nor accept that the UK government presided over this and helped it come into being through its monetary and regulatory decisions.

We know, Minister, the age of irresponsible credit is over. Do you know Minister we are now in the age of practically no new credit? Do you realise this is going to make the recession longer and deeper? Do you understand your banking measures so far have not solved the problem? Will you look again at your banking package, to see how it can be changed? Do you not yet understand it needs to protect the taxpayer more, whilst doing more good for the banks? That would not be difficult, given the manifest imperfections of the current approach.

Can a funded tax cut help create jobs and activity? Does a tax cut have to be unfunded to work its magic of reflating an economy?

This is the new idiocy in Labour’s view of the economic debate. To them an unfunded tax cut – a tax cut which means the state has to borrow more on behalf of taxpayers to carry on with its high spending – is the only type of tax cut which makes sense as they try to stop recession turning into depression. This, like all government soundbites, needs examining.

A tax cut “paid for “ by borrowing does not necessarily reflate an economy. It depends who lends the money to the government, and what else they would otherwise have done with it, it depends on how the government spends the money it borrows, and how the person or company receiving the tax cut behaves.

If the money the government needs is all borrowed from UK individuals and companies, they will spend less on goods and services in the UK in order to find the money to lend to the government. Mr and Mrs Prudent may be tempted to save more and spend less if the government offers attractive interest rates in order to borrow all the extra it needs.

If the people receiving the benefit of the tax cut use it partly to repay debt or to save themselves, that portion of the tax cut will not be spent and will not generate immediate employment for others. Mr and Mrs Overstretch will not reflate by spending if their nationalised mortgage company is demanding more interest and their semi nationalised bank is demanding repayments on the credit card account. If higher income people spend their tax cut on imports or a foreign holiday, the favourable impact on UK jobs of the spending will be also be much diluted.

If the government persists in spending much more than it collects in taxes, not all of this spending creates extra jobs or activity. Some of it passes to public employees who save it. Some is put into public sector pension funds who may keep it in cash or invest it abroad.

Conversely, a tax cut “funded” or paid for by reducing government spending may still be reflationary to some extent. Again it depends on who receives the tax cut, what they do with the extra money, and where the public spending saving comes from. Let us take a desirable but unlikely example. Let us assume that the government decided that every public employee earning more than say £63,000 a year (an MP’s salary) was to take a pay cut to help sort out the crisis. Let us suppose this was spent on giving income tax cuts to the lower paid. A substantial chunk of income would pass from people who are saving a considerable proportion of their good incomes, to people who would spend more of it as their budgets are badly squeezed. It would probably also help the balance of payments, as people on high pay tend to spend much more on foreign travel and other foreign luxuries. This would have some reflationary benefits. A more realistic example might be some reduction in government payments to very expensive consultants, who save or spend abroad substantial amounts of their income, to allow a tax cut to lower paid people who will spend more of it.

The point the government does not want to understand, but the MPC now does, is the risk of borrowing too much. If a country borrows more than investors in international markets think is reasonable, the whole country ends up suffering. The currency falls, making all imports dearer, and the price of borrowing rises, making all taxpayers worse off. In extreme cases like Iceland there can be a collapse of normal banking and commercial activity and the need to go to the IMF and other foreign lenders for the imposition of proper public spending and borrowing disciplines – something a Labour government had to do in the UK in the 1976. That is why the Opposition is right to urge the government to keep its borrowing within sensible limits for these extraordinary times.

I favour tax cuts as always, but I also favour better controls on public spending, starting with the over expensive banking share buying. “Back the banks, don’t own them” should be the slogan..

It was good to hear David Cameron saying we need to cut out waste and unwanted expenditure, and good that he now recognises that Labour’s spending plans post 2010 are unaffordable. Labour responded in two contradictory ways. They both lied that Tories would cut jobs in front line services, and then said they could find more “Gerschon” style savings by running things better!

As readers of this blog will know, I think the least affordable part of Labour’s spending plans is the purchase of bank shares. The Lib Dems today rightly say the share purchase proposals are not working, before going on to recommend a dearer and worst mess by saying they want the government to go directly into the banking business,lending taxpayers money to companies direct!

There needs to be some clearer thinking how to support and encourage banks to lend more. The government has negated the favourable impact of £37 billion of extra capital for 3 banks, by demanding more capital for any given volume of lending. The regulator, who kept levels of capital too low during the boom has now set them higher to intensify the crunch. The greater regulatory requirements cancel out the extra taxpayer capital.

The government is now trying lower interest rates, printing more pounds, ballooning the Bank of Enngland balance sheeet, guarantees and short term loans on a big scale. These devices should start to loosen the squeeze. However, the potential losses on bank loan books allied to the extra capital requirements laid down by the Regulator mean much less lending than in the bubble days, as you would expect. People should understand that the regulators have called time on easy credit, so we are not going back to 2006 conditions any time soon.

The bank capital issue needs rethinking. Government should reassure markets it stands behind all the major banks with short term loans, guarantees and liquidity.It should renegotiate the share issue and ask the banks to find more of their own extra capital as they can do. At the moment taxpayers are sitting on a loss above £7 billion for no good reason. Anyone who thought £37 billion would fix it did not understand it. The government should start worrying about how easy it would be to lose all that £37 billion, given the scale of the banks balance sheets and the risks being run.

Last week I tried again to get the message through to the government that taxpayers cannot afford their bank share buying package. If they still doubt me, they should just look at what the international financial community thinks of this government’s economic policy. Since the summer the pound has slumped from $2.05 to just $1.45 as I write this. That has slashed our living standards and the value of the pound in our pockets and purses.

If you can still afford to go the States, that $2.05 cup of coffee which cost £1 in June, now costs you £1.40. The same has happened to anything we import which is priced in dollars. It means a large amount of the fall in the oil price will not benefit us, for oil is priced in dollars. We have lost even more against the yen, so it means buying fewer Japanese cars and electrical goods and paying much more for them.

I spoke in the Economy debate on the Monday, blogged about the crisis everyday on www.johnredwood.com, was invited on Newsnight and ended the week on Any Questions. My message was simple. The banks they want to buy are too big. The costs of redundancies and write offs could be large for taxpayers to carry. The £37 billion to buy shares in RBS and Lloyds/HBOS, combined with the £18 billion being borrowed to sell the deposits of Bradford and Bingley to Santander is simply too much for the poor long suffering taxpayer to carry.

In reply, the government just says it had to rescue the banks. Yes, of course it should lend them emergency money if they need it, and guarantee transactions if that is necessary. It should always do so taking good security for the taxpayer, and should do so for as short a time as possible. No sensible person wants a major bank to go under. No, it should not and did not have to buy shares in them. So far taxpayers have lost £580 million at Northern Rock, and had to put up another £3 billion of capital for that bank. Neither Northern Rock nor Bradford and Bingley now lend new mortgage money to customers. That’s another blow to the housing market, and is helping destroy jobs in housing related work.

Do I think the government should cut income tax as well as cutting interest rates to shorten and lessen the recession? Yes, of course I do. Do I think they can afford do, given their levels of spending and their commitments to the banks? No, of course I don’t. They need to change course, and do so quickly. The recession is spreading rapidly to the rest of the economy, from property and financial services where it started. The economy needs the tonic of lower interest rates and lower taxes to stop the losses and to start a recovery. All the time we have the present government’s spending and borrowing levels we are at risk of more losses on the currency and more difficulty borrowing all the money.

A modest devaluation of the pound earlier this year could help our exporters and curb some imports. It would speed the adjustment we need. The massive fall, the currency rout we are experiencing, is damaging. It makes us all poorer, and makes the government’s task of raising all the money it wishes to spend that much more difficult. The government needs to remember that borrowing is deferred taxation. Taxpayers have to pay it all back with interest. It needs to root out waste and stop its share buying.

Yesterday I debated the state of Britain with Hazel Blears and the Young Fabians in a Committee Room at the Commons.

Mrs Blears did what Labour now always does. She personalised the whole debate to me. She laced her remarks with personal abuse towards me, and ascribed views to me I have never held. Her two favourite lies were that I wanted to sack teachers, nurses and doctors, and I wanted to deregulate mortgage banks.

Back in the Commons Chamber, the Prime Minister was busily misrepresenting Conservative views. He accused David Cameron of changing his mind on borrowing, unable to distinguish between David’s remarks on the natural rise in borrowing that a recession causes (which David accepts),and the additional rise in borrowing that the PM is advocating as a matter of policy (which David opposes). For good measure the PM repeated the point about deregulation and the Conservative party Policy Review.

I asked him why he fails to quote the advice in the Economic Policy Report to strengthen capital adequacy regulation of the banks,and to strengthen the role of the Bank of Englandas the controller and supporter of the banks. As he seems to like quoting the Report so much, it is such a pity he leaves out the best bits. If he had followed the advice, we would not have seen a run on Northern Rock, and taxpayers would now be a lot better off.

Listening to Labour figures, they sound as if they think the Conservatives have been in offcie and are to blame for this crisis. I don’t think that’s how the public sees it!

Yesterday in the Sky debate with Will Hutton I was impressed by Will’s realism. Far from trying to argue the self justifying and unrealistic Labour line, Will concluded:

1. There is a serious banking problem, which has still not been solved or gone away
2. There is a UK government borrowing problem, and the government did fail to put the finances in order in the good times
3. UK banks are very large in relation to the National income and the size of the government’s revenues. We could have a small version of the Iceland problem, as banks here are more than 4 times GNP. There are limits to how much the government can support them as a result.
4. Government does have to keep confidence in the currency and its finances to maintain borrowing at sensible interest rate levels
5. The Shadow Chancellor is not the reason sterling is falling.

I hope I have been fair to him in this summary. My purpose of repeating this here is to appeal to all those government supporters who read and comment on this site to listen to these points. If Will and I agree about these things there is the chance they are right. Will’s agreement demonstrates these are not “right wing” criticisms, as Labour usually seeks to suggest when I put well meant and serious points to them.

My conclusions from all this are also pretty clear:

1. The government needs to take action to cut its borrowing this year. It can do so by changing its approach to spending on the banks. They can raise more of their capital for themselves, sparing the taxpayer. Will and others do not yet agree with this, but it is the cheapest and best way out of the government’s hole. The government should sell off Bradford and Bingley and Northern Rock as quickly as possible, taking its loss before it gets bigger.
2. Once this has been done the government should then cut taxes, putting more money into the pockets of those likely to spend more.
3. The government needs to widen the range of stocks its issues to finance its remaining debt, with more at the long end of the market and more index linked securities.
4. The government needs to pursue its Gershon and related savings more energetically. It should impose a staff freeze on administrative posts, and terminate index linked final salary pension schemes for new recruits.

I welcome the fact that the Conservative party is examining a changed economic strategy for the changed conditions. This strategy must include plans to deliver more for less throughout the public sector, building on the big three themes the party has identified for savings. It should also include lower taxes on income and enterprise, funded from the reductions in spending. There will be no proposed cuts in teachers, nurses, doctors, service personnel and other important front line public servants, nor should there be.