Blog 2023 Malcolm Blair-Robinson

Today is an historic day, though with the term in almost hourly use by the media to describe events in Egypt, its significance has been given less coverage than it deserves. For the first time in many years the U.K Foreign Secretary has been openly critical of American foreign policy and put distance between London and Washington. At last we are getting somewhere and this blog congratulates William Hague for at last doing what should have been done years ago.

The issues are the joint performance of Israel in the Mid East Peace process, which is obdurate and impossible and the its patron, the United States, which has historically been weak in restraining the excesses of the Jewish State, to the point where Israel has lost almost all her friends in the world. The U.S. vacillates over pressurising its ally to see reason and behave reasonably. The outcome is that the future of Israel has a state can no longer be taken for granted and America looks, to the rest of the world, craven in its dealings with its hot headed friend. This is wholly counter-productive for both, as well as bad for the interests of Jewish people everywhere.

That Hague has now spoken out is very good. That he has done so publicly will cause a huge stir behind the scenes in Washington, where nobody living will be able to recall a precedent for such criticism from the other half of the special relationship, in which the U.K. is supposed to be entirely compliant. If the Foreign Secretary could now follow this up with a bold set of demands upon which peace in Palestine could be based, it would be even better.

Finally on a footnote. One of the biggest blunders of U.S policy in the middle east was when the Palestinians elected Hamas as their government and the U.S. refused to recognise it. The first rule of promoting democracy is that when it thorows up a result you don’t like, you have to accept it.  That lesson may have to be relearned with Egypt.

This news is not a substitute for a proper reorganisation of the banks but it will be popular with those outside the City. The banks should be pleased that they have been let off lightly. However, the attempt by the government to pusuade the banks to enter into some sort of agreement to lend more to aid the recovery, is incoherent nonsense and will have, if implemented, the reverse effect. It is like telling an alcoholic that part of his drying out programme is to drink more. For an economy which has hit the buffers because everybody borrowed too much, borrowing cannot be the way to get back on the track.

The banks’ position is, as I understand it, that there is not a great demand (good) and that they will lend only to businesses where the risk is judged to be commercially viable and within the boundaries of prudent banking. That is very good. Under no circumstances whatsoever should the banks allow themselves to be forced back from this essential base. No business can be founded well on borrowing. It must be founded on investment. Once up and running, with a clear and achieved business model which delivers profits and has the cash flow to finance borrowing, then maybe. The banks will say yes if it looks good. That is right.

There is a case for having more and smaller banks with regional connections, offering the facility to help small businesses to raise investment capital without borrowing and thereafter to smooth their cash flow. It is these and other structural defects in our over centralised banking system, dominated by giants too big to fail, now so huge that they are too big to save, that have to be put right.

To assert that things would work better if these big financial conglomerates lent more is to proclaim that very few lessons have been learned about how we got to where we are.

This blog has never been happy about this idea. It does not mean that it is a bad idea, but it is certainly a bad idea to introduce what amounts to an ideological opportunity to sharp elbowed parents, at a time when money is short even to keep mainstream schools in proper repair. It is also a concept at variance with the philosophy of the Tory Party and for that matter the Big Society. This is because, for reasons which defy rational explanation, these schools are to be set up with taxpayer’s money. Such a proposition is unsaleable as fair to those whose school budgets are cut while these schemes gain approval. 

All would be put right if, like in Sweden and America, the parent groups were required themselves to find and raise the money to buy, build and equip the schools. The state, if such schools passed the test of being up to standard, would then pay the standard per head, pupil fee. That may, so long as excessive over provision was refused, introduce better standards in education and allow specialisation where called for. It would allow the private sector to become involved in provision, which would help bridge the gap in outcomes between the two education sectors, still yawning.

Whether the state pays itself an annual fee to educate each pupil or pays some other organisation to do the same thing, perhaps better or maybe worse, is a practical not ideological question. For the state to take its own money away from its own provision and give it to third parties, while depriving itself of needed resources is just wrong and very wrong when funds are short.

Every time one tunes into a current affairs programme or the news, there is waiting a queue of interested parties complaining one after another about the cuts. Whether it is the police, the NHS or social services, the arguments are powerfully put by those who believe their patch is critical to national cohesion. The latest casualty is said to be the Big Society. All these champions are right in detail but wrong in principle. Cuts mean cuts for everyone. Ring fencing was foolish because it creates the illusion that some things can escape. It also spreads the burden unevenly. It was a bad idea.

What is revealed by the wave of protest is just how much the state is paying for that either should not be there in the first place, or should be nothing to do with the state. Having said that there are clearly sections of the community on whom the burden falls disproptionately and to whom a balance of opportunity must be offered.

This should take two forms. Removing the low paid from income tax, at least up to £12,000 p.a earnings. Removing, too, barriers to employment that the nanny state has created so that it is easy to get a part time job because employers find it easier to offer them. Whilst retaining basic protections to avoid exploitation, employers have got to be freed from ludicrous strictures of health and safety, human rights, unsuitable working hours and so on. This does not mean that these important protections should be abolished, simply made the subject of common sense, not detailed prescription.

Current re-examination of Reaganomics reveals their impact was not as hoped and indeed lie at the core of much of what is wrong with the American economy, as well as our own. The principle that that you give to the rich who in turn will create wealth to look after the poor, is right only if it is just one ingredient of a balanced approach.  A cake cannot be made with butter alone.

Tax cuts, especially, must be aimed at the poorest, because it is they for whom tax is the biggest proportionate burden. Additionally, especially and critically, asset inflation beyond true worth must be curbed by structural change, since this destroys the fabric of life for the mass, whilst shifting resourses to the few. Not only does this lead to a top heavy economy which, as we now know, will eventually fall, but when it does, it is found to be without foundation in the facts of  sound money, measurement and mathmatics. 

This is why we now face cuts. There is no way round it. They will hurt. Everybody.

I have a problem with this. Ed Milliband showed a good deal of flair in the way he brought Labour’s view of the economy to the fore, without being too specific about how to do better than the coalition. Balance means borrow more, in the hope that revenue goes up quicker. Unfortunately the eye watering debts already piled up make such a proposition little short of reckless. If we were  starting from a sound financial base such an idea could be valid, even wise.

So this blog continues to lack faith in the opposition’s grasp of our economic difficulties. Unfortunately, the British Promise casts doubt on its social comprehension. That is worrying because good government requires a good opposition. It is impossible to promise that each generation shall have it better than the last, not least because all the time some are rising while others are falling. In a world of finite resources the endless chase for more and better creates huge inequalities and gaps between the haves and the have nots. Moreover it tends to inform a culture of me first and it is my right to have anything I can grab.

This is partly why, under New Labour, the gap between rich and poor grew wider, the underclass balooned, there was a borrowing binge and housing costs reached economy crippling levels. This is not an improvement on the lot of the previous generation and if it is described as the fulfilment of some kind of promise, it is one which should never have been made.

What we should aim for is, as each generation passes, to create a more equal society, in which improving outcomes are evenly spread, where there is no underclass and where good housing, education and health lead to good job prospects for all. It has to be  on a green road where less of the natural earth is plundered for the benefit of the few and were natural and finite resources are conserved, not exhausted. I should have thought there were few in the Labour Party who would disagree. Unfortunately their leader seems to be singing another song, which, to the well tuned ear, sounds remarkably like meaningless spin.

The IFS has speculated upon an Osborne Plan B. In the old days these were called U-Turns, made famous by Margaret Thatcher’s dismissal of the idea at a Tory conference, since when no economist or politician has dared go near the term. The new buzword is Plan B. Like the old U-Turn Plan B can be a fast track to Plan IMF.

This is because such plans all have the same ingredient; more borrowing. For the second most borrowed nation on earth, if you take everything into account, this is not an option. The option ahead for the Treasury is actually a requirement. It is the growth element of their current plan. This may cause a temporary surge in the deficit if tax cuts are a feature, but the stimulus of these is powerful and immediate, if they concentrate upon the least well off. In austerity, those on low incomes cannot spend, because they have no cash left. Give more and it will at once be used.

It is imperative that the cuts carry on. There is no future for an obese state, gorging on the labour of the private sector. Such an economic plan has failed in every economy in which it has been used. There may be a case for some speeding up of capital projects and, as previously suggested, the restoration of some part of the school rebuilding programme. Overall the appetite of the state for revenue has to be shrunk and this requires surgery which cannot be delayed.

Finally a question should be asked of the efficacy of ring fencing. This election pledge, like the Lib Dem tuition fee debacle, should not, in the fiscal climate of May 2010, have been made. I doubt it won many votes. Anyway it did not win enough. It may have to be dumped. Overall, however, the economy has to change direction to get out of trouble and to do that, like a speeding bus on a bend, it has to slow down. Otherwise it will crash. December’s growth figures are no cause to panic. Indeed quite the reverse.

The Chancellor has set a monetarist course of cutting government expenditure by shrinking the size of the state. Pointless functions and organisations are axed and lots of jobs have disappeared. So big had the state become, it is inevitable that the shedding of its functions will reduce GDP. This does not matter, indeed it has to happen, so long as measures are introduced to boost the private and corporate economy. It may be that the Treasury has been over zealous axing some capital projects, rebulding schools perhaps and maybe Nimrod. Getting it right is near impossible, going in the right direction is compulsory. The Chancellor is going in the right direction. So far.

In his budget next month he has to be bold. Very bold. He must eye potential revenue as a prize, but he must separate reveue from rates. There are voices now being raised for tax cuts which can have real impact in not only boosting economic activity, but setting the enterprise which beats in every British heart free. In my book I argued for income tax reform involving a single rate, with all low paid removed from income tax altogether, up to earnings of £15000 p.a. I also pointed out then and later in this blog that for the level of government expenditure Labour constructed it had set tax rates too low,  notwithstanding the drain on the private sector which had to pay for it. It was runnning a deficit even before the crash.

The Coalition is now on a robust programme to cut the vast harvest of willy nilly spending. It cannot simultaneously increase taxes on income and business because it will choke off expansion of the private sector. But it can cut them and it should. It can, by cutting tax immediately, increase consumer spending and business investment. This will provide a significant boost to the economy. Politically it will demonstrate a rounded policy of cutting the state and increasing private enterprise. In turn this reduces the deficit when in full motion, but, more important it remodels the economy on a dramatically better and more sustainable structure.

To succed the proposals must be bold, so that all at home can  feel the freedom and outside investors see an opportunity. Increasing the personal allowance to £12000 p.a. (this would mean a couple earing jointly £24000 would pay no income tax), reducing corpration tax to 20% and 10% for small companies (the engine of the economy) would be a start. Shaving 2.5% off the top rate (in the long term a revenue negative tax, even if a political necessity when introduced) would give a signal that Britain is becoming, once again a very good place for business.

The spike in borrowing would be short lived. The economy would soon begin to show real growth. Remember manufacturing, from a very low base, is growing at record levels. These measures would help it take the lead in the drive for a better economy. 

That done, George and Vince can fix the banks. The people will not let them fudge that task.