Macmillan Lecture 2013: ‘Keep Calm and Carry On Reforming’

 MACMILLAN LECTURE 2013

Keep Calm and Carry On Reforming 

By Rt Hon Damian Green MP

The previous occasion I delivered the Macmillan Lecture was in 2005, just after a disastrous election result for the Conservative Party which saw us make little progress even though Tony Blair’s Government was visibly crumbling.

“Why aren’t we thinking what they’re thinking” was the rather gloomy title, prompted by the thought that the lack of progress made it much more difficult to obtain an overall majority in the subsequent election—a sadly prescient point. One thought I was keen to make then is equally true in the very different world of today; that if the Conservative Party does not like modern Britain it is unlikely that modern Britain will warm to the Conservative Party.

Of course there is much that needs to be changed, and much that is changing because of this Government. As I say in the title of this lecture, we must carry on reforming.  But we should not let the long recovery from recession, or individual horrible incidents such as the Woolwich killing, leave us gloomy or grumpy as a country. It is less than twelve months since the world admired the best Olympics of the modern age. They admired not just our national organisational skills but the character, warmth and openness of the British people. We should not just keep calm, we should cheer up.

I should move from the national to the party.  The same injunction applies.  

Perhaps this is the appropriate moment to fulfil the duty of all who deliver this lecture to quote Harold Macmillan; “It is the duty of Her Majesty’s Government neither to flap nor to falter.” Admirable advice which is both timeless and timely.  For centre-right politicians there are significant reasons to be both calm and cheerful , the most notable of which is the public’s reaction to the financial crisis and subsequent recession. It was the fond hope of those on the left, perhaps particularly those who grew up at the feet of Marxist philosophers, that this would be seen as a crisis of capitalism. The people would throw off the shackles of false consciousness and realise that free markets had failed, and that state spending, borrowing and control was the route out of recession.

Fortunately the British people have more sense than that, and tend to prefer the analysis that state spending and borrowing was precisely the route into recession. There is no spin in this analysis. Successive poll findings have shown  that even when Labour is enjoying a significant lead the Conservative team is markedly ahead on managing the economy. This is true even over the past few weeks, where calmness has not been the prevailing emotion.

The most recent Ipsos Mori poll showed a 14 percent lead for David Cameron on managing the economy. Truly, if it still is the economy, stupid, that sets the political tone we are winning the most important argument.  British Keynesianism failed in the 1970s, and enough people know that to ensure that its modern enthusiasts have little credibility. The world has not gone left since the crisis. Where right wing Governments have been ejected, as in France, the left-wing alternative is already in trouble. The economic facts of life are still Tory.

So keep calm. But also carry on reforming, and more particularly carry on reforming in a Tory way. There is gathering strength to the argument that the reforms we are seeing to, for example, immigration, welfare and education address exactly the issues that people want Government to concentrate on.

These key reforms have three significant features. The first is that they are as important to the success of the Government as the central economic policy. The second is that all of them are dependent on Conservative ideas and energy to drive them through. The third is that they are precisely on the Common Ground originally identified by Keith Joseph as the proper target for successful Government, rather than the centre ground.

So as well as winning the central economic argument we are reforming in the areas where the country needs changing, and we are doing so in a Conservative direction. This message cannot be sent too often or too loudly, particularly to traditional Conservative supporters. They want lower immigration, an end to abuse of the welfare state, and higher standards in schools. Conservative Ministers, drawing on Conservative principles and our Manifesto promises, are delivering this.  

On immigration, the latest figures show that net migration is down by more than a third since June 2010, and is now at its lowest level for a decade. At the same time as seeing this dramatic decline in overall numbers, which is the main requirement, we have continued to support economic growth by welcoming the brightest and best to the UK. Higher numbers of skilled worker visas were issued over the last year, as were university student visas. So we have lower immigration, and more selective immigration: both good Conservative policies.

On welfare, we have introduced the biggest welfare to work programme the UK has ever seen to get people back to work.  We also believe it must always pay to work – which is why we have capped benefits so that no one can get more on benefits than the average person earns in work. We want to help people escape poverty, not trap them in it. This reform is squarely in the tradition of  which Harold Macmillan would have approved.

The same is true with our education policy. We are making sure that every parent has the choice of a good local state school for their child, teachers have the powers they need to keep discipline in the classroom and the exam system is rigorous, respected and on a par with the world’s best.

We have a programme to improve the quality of teaching, including scholarships to attract the best graduates, higher literacy and numeracy requirements for trainee teachers and a network of ‘Teaching Schools’ across the country.  79 Free Schools and more than 2,000 new Academies have been delivered already. Many of them are in areas where most people have not been able, up to now, to gain access to an excellent education for their children. We are restoring discipline to the classroom with new search powers for teachers, an end to the ‘no-touch’ rule, and higher fines for truancy.

All of these essential reforms have been delivered by Conservatives working in a Coalition Government.

Which brings me to a theme which is particularly important for the Tory Reform Group, and all moderate Conservatives.  There may be areas of policy where we agree with Liberal Democrats, but we are not the same.  We believe in change and modernisation , and we recognise that what modernisation means changes over time, but we are first of all Conservatives. We have principles which are not shared even by the most orange of the Orange Bookers. We also do not regard ourselves in any way morally deficient compared to Liberal Democrats.

I get on very well with many of my LibDem Ministerial colleagues, but I am entitled to challenge their thesis that this Government can only be kept compassionate by their presence. There is a long and honourable tradition of decent Conservatives who want to help those who need help, and Macmillan himself was of course a prime example at all stages of his political career.

Macmillan  was alive to the difference. As he put it; “As usual the Liberals offer a mixture of sound and original ideas. Unfortunately none of the sound ideas is original and none of the original ideas is sound.”  We do have practical differences, as I discovered on a regular basis when I was Immigration Minister.

There are similar debates about key issues such as childcare. All of these debates can be, and are, resolved within Government, as they would be whether it was a Coalition or a one-party administration. But they illustrate that the moderate Conservative tradition is a vital part of any Conservative mix, and is distinctive from the instincts and habits that the LibDems bring to politics.

This distinction is key for those who worry that in the Coalition the tail is wagging the dog. We are reforming and we are reforming in a Conservative direction. Every Conservative policy is about promoting opportunity and social mobility.  We know that  making Britain succeed globally and allowing people to achieve their aspirations are the two keys to a successful society. Economic growth and individual growth need to go hand in hand. This is the basis for economic and social policy under this Government and I cannot understand why any Conservative, whichever tradition they adhere to, would object in principle to this approach.

There will always be disagreements about tactics and day-to-day priorities but these must not be allowed to divide the right, when the only beneficiaries will be the left. All  of us who campaigned so hard and so successfully to preserve a first-past-the-post electoral system must accept the consequences. Under first-past-the post a serious party that aspires to Government has to be a broad coalition.  This in turn requires a degree of self-discipline and capacity to compromise. If we Conservatives forget that, our opponents will be the beneficiaries.

This means that the tone of the discourse between Conservatives is important. If we sound as though we dislike each other, others will draw the obvious conclusion. I love Twitter, but its general tone should not be a guide to how Conservatives address each other. Disagreement on an issue, however emotive, does not mean treachery, or not being a proper Conservative. Politics is a team game, and mutual loyalty is vital for a successful team.

The biggest and longest-running cause of Conservative discord is Europe. Every Conservative should have a high regard for the lessons of history, and the party’s history on this issue since the 1990s is terrible. The effect of this has been, ironically and yet predictably, that Britain’s fate in Europe has been in the hands of those who have no sympathy at all for the Eurosceptic viewpoint. Surely we are all able to learn this lesson of history and not repeat it.

I am not just lecturing others. We must all learn lessons. For years pro-Europeans opposed the idea of a referendum. But the strategy of negotiating a new settlement, and then putting that to British people, is clearly the right one for current times. Most British people want it to happen. So much has changed since the 1975 vote that it is time to put the argument again. I hope and expect that the outcome of this process will be to renegotiate, reform, and revalidate Britain’s place in Europe. The Prime Minister has made clear that this plan will be central to Conservative policy up to and beyond the next election. It is time for the whole party to get behind it. And it is possible for those who hold the whole range of views on Europe to do so.

For those of us sympathetic to the European argument this is an opportunity to make our case, and the Prime Minister’s case, that a properly reformed EU will be hugely to Britain’s advantage. For too long only a few lonely voices in the Conservative Party have made the case that we are better off in. Those of us who hold that view cannot wait for the few weeks before a Referendum to argue our corner.  There is a hard-headed Conservative case for Britain’s membership of the EU, for all its imperfections, and it needs to be heard.

The core of the argument is economic. All sectors of industry agree that we are better off in. Let’s start with manufacturing. Five out of every six cars made in this country are exported, and 700,000 jobs depend on the industry.  How many of those firms would invest long-term in Britain outside the EU? No wonder Ford’s European Chief Executive, Stephen Oddell, has said that “Leaving a trading partner where 50% of your exports go… would be devastating for the UK economy.”  

Then there is the City, often seen as the part of the economy most hampered by EU rules. Goldman Sachs are unlikely to be sentimental about the economic effects of leaving, and they have concluded that departure would be a loss/loss scenario, in which the loss would be greater for the UK than the EU.  In particular they argue that “The UK’s ability to conduct business in financial services across the European Union is likely to be severely compromised by a departure from the EU.”

Then there is the argument that we should concentrate on the fast-growing economies in Asia and South America rather than sclerotic old Europe.  I have never understood how you make it easier to export to China by making it more difficult to export to Germany, and indeed the German example is surely one to follow. Last year Germany exported $804bn worth of goods to Europe, and another $519bn to the rest of the world. They are complementary markets, not alternatives.

Finally there is the argument that our businesses have to obey all these petty rules that hinder them. Does anyone imagine that the rules would be less onerous, or indeed less of a hindrance to British business, if they were made without any input from Britain? Since Britain will need to trade with Europe, we would be putting an added burden on our business, not removing one. And we would have to pay a large fee for access to the Single Market, as Norway does. The idea that we can remove all the irritations, but retain all the benefits, is not worthy even of the saloon bar.

Of course there is need for reform, not just for Britain’s sake but for Europe’s. We need a Transatlantic Free Trade deal. We need a single market in a number of new areas, including digital services. Above all, we need a reform deal which will deliver benefits to every country in the EU, so that others will be as keen as we are on reform.  This will show how beneficial it can be when Britain plays a leading role in Europe.

This European reform will be consistent with all the other hard-headed, unsentimental, pragmatic, Conservative reforms which the Government has embarked on. It will fit in with a wider modernising agenda which is nothing to do with party image and everything to do with making Britain (and Europe) fit to compete in the modern world. All these reforms, taken together, will change Britain for the better. So the job of all Conservatives at this point is neither to flap nor falter, but to get on with the job of persuading people that Conservative principles in action give all British people the chance to succeed. We should be proud of our record so far, and we know there is much more to come. We have an important job to do. We should devote all our energy and time to doing it. 

Autumn Statement 2012: A lot of Balls and a bleak midwinter?

Nik Darlington 2.57pm

I was on BBC Radio Scotland earlier talking about the Autumn Statement and just before I was due on air with the Daily Record's political correspondent, the weather report told tales of snow drifts, icy condition and road closures - painting a generally bleak midwinter picture.

In isolation, that report could’ve been about the British economy. Those heady summer days of Olympian achievement and a return to growth seem ever-more distant. This is the backdrop to what the Chancellor had to say to Parliament today, and the inclement economic weather should never be forgotten.

Indeed, Mr Osborne is set to break his own fiscal rules. Yet Gordon Brown also did that, but in the boom years - a symptom of the budgetary misbehaviour that characterised the Treasury under the feckless oversight of Mr Brown and Ed Balls.

The former Prime Minister might have lost a stick insect, but his former lieutenant was not grieving. Cheeks puce and puffed out, he berated, bewailed, gloated and tore into the man who’s office he might have had if only Alistair Darling were a lesser man.

When Ed Balls is good, presentationally at least, he is very, very good. Yet George Osborne is rarely better than when sparring with his opposite number (one gets the impression they enjoy it). I’m as unconvinced about the ‘blame Labour for all the economy’s ills’ line as I was at the time of the 2011 Budget, however Mr Osborne continues to play the card strongly, persistently and - judging by the looks on the faces of Eds Miliband & Balls - effectively. How well it plays with the public is another matter.

Former Tory whip Michael Fabricant relayed to the Chancellor the instantaneous thumbs-up from the bond markets, stating “it is the markets that matter”. Apt, to the point and certainly good news - though what voters think cannot be taken lightly either. I know what someone as acutely political as Mr Osborne will be thinking about first thing he wakes up in the morning.

Conservative MPs will be pleased with the scrapping once again of a 3p rise in fuel duty. Harlow’s MP Rob Halfon has led backbenchers on a spirited and tireless campaign against the duty, though one has to question how much gas is left in that tank. Can fuel duty rises be fought forever?

The lower threshold for income tax continues its rise towards £10,000, as expected. The personal allowance shall be £9,440 come next April.

Also to be welcomed is the further cut in corporation tax to 21 per cent. Let us not forget that it was as high as 28 per cent when the Coalition took office. Businesses can invest a greater proportion of their profits into the likes of expansion and employment. This is very good news.

The hit on working-age benefits will not play well, of course. Shrieks of unfairness can already be heard around the tenured ranks of social policy think tanks, the opposition and the like. And indeed it doesn’t look good. However, there is also the moral argument that at a time when wages are struggling to keep up with inflation, if rising at all, should welfare handouts continue to outpace? It’s a tough call, but I think it is the right one. It shall save nearly £4 billion. We can slice and dice this, that and t’other bits of public expenditure but until welfare payments are properly addressed, that ruddy old deficit shan’t budge much.

Those are my two-pennies’ worth. Plenty of ink shall be spilt and trees felled elsewhere in pursuit of explaining today’s Autumn Statement. I shall just finish with a brief thought on shale gas. I’ve had my concerns in the past about fracking for shale gas. I’m still not convinced of the safety record but I’m open to being so; and if it is the energy panacea some claim it to be, then by all means it should be pursued. Though not at any environmental cost.

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General Anti-Tax Avoidance Principal offers a new judgement-based approach tax

Matthew Robertson 10.39am

"The hardest thing in the world to understand is the income tax." - Albert Einstein

The list is never-ending:

  • May 2012 - 2,000 senior public officials on more than £58,200 were found to be paid “off payroll”, which could minimise their tax bills, according to a leaked letter obtained by Exaro, the investigate website and the BBC’s Newsnight programme.
  • November 2012 - A tax avoidance scheme, marketed by Ernst & Young, that claimed to license newspaper mastheads to avoid tax, has been thrown out by a tax tribunal.
  • November 2012 - Amazon, Google and Starbucks accused of being “immoral”, “manipulative” and of “practising tax avoidance on an industrial scale”.

It is difficult to find someone who doesn’t have an opinion on tax,  a meritocratic society relies on the idea that everyone pays their fair share yet there must also be incentives for individuals and companies to create wealth.

This dilemma has troubled governments for as long as tax has existed and the above examples show that they are not always successful. The onslaught of globalisation and multinationals has further hampered the ability of national governments to tax efficiently as the question of residency becomes less clear.

The constant attempts to avoid tax by individuals and corporations has created a behemoth of tax legislation with some rules dating back centuries. In 2009, Lexis Nexis revealed that the UK’s tax code has more than doubled in size since 1997, going from 4,998 pages in 1997, to 11,520 in 2009, making UK tax code the longest in the world.

Many have called for HMRC to have more powers and better resources to tackle tax avoidance as government initiatives have failed to prevent both individuals and corporations from ‘bending’ the rules. The implementation of IR35 is a prime example of misplaced tax legislation. It took effect in April 2000 and was designed to eliminate the avoidance of PAYE and National Insurance contributions (NICs) by ‘contractors’ who for all intents and purposes are employees.

As the BBC example above illustrates, IR35 has not delivered on its promises and moreover, it has had a negative impact on some businesses as clients become reluctant to engage with some professionals for fear of them being liable for PAYE on their fees. Furthermore, in some instances the legislation is unfair on certain freelancers as employer NICs at 13.8 per cent need to be paid as well as employee NICs and income tax of up to 50 per cent. IR35 has been found out to be unworkable and there is no evidence that it raises any income for the Treasury.

The failure of IR35 is similar to why Albert Einstein could not understand income tax but could comprehend quantum physics. That is, applying a rules-based approach to tax is always likely to fail as rules are open to abuse by their very nature. Rules cannot be applied to individuals in the same way that the laws of physics can be applied to atoms. The wording of any rule can be interpreted to have been complied with or not and it is because of this that many have been able to work within the rules to minimise their tax liability.

The Institute of Chartered Accountants in England & Wales (ICAEW) realised this a while ago and adopt a principles based approach to ethics:

"The ICAEW pioneered the principles-based threats and safeguards approach to Codes of Ethics in the accountancy profession internationally. We believe that this approach is flexible but robust because it focuses on the spirit of the guidance and encourages responsibility and the exercise of professional judgement. The guidance can be applied to the infinite variations in circumstances that arise in practice and can be adapted to rapid changes of the modern business environment."

Professional judgement is the key; HMRC should be able to analyse the economic substance of transactions to determine whether the behaviour represents the true nature of the business or whether it is merely avoiding tax. It is encouraging to see the ‘General Anti-Tax Avoidance Principal’ Bill being debated in Parliament on Friday. Richard Murphy, one of the main contributors to the bill, makes a good case for how successful a rule such as this could be.

One of the main ways Starbucks was able to make a loss in the UK was to pay a 6 per cent royalty to another Starbucks company for the use of intellectual property attached to the brand.

Murphy argues: “The profit stays within the group, and it cannot be justified as commercial since no one would pay a royalty for thirteen out of fourteen years to make continuing losses.”

In other words, economic substance has nothing to do with actual trade and is merely being pursued to avoid tax. An anti-tax avoidance principle would allow HMRC to apply a greater degree of professional judgement instead of following set rules.

Furthermore, it would dampen the obsession of creating more and more rules to close ever more elaborate loopholes. There is nothing inherently wrong with individuals and businesses managing their affairs to minimise their tax liabilities; no one would argue that investing in an ISA is immoral tax avoidance.

Nevertheless, there is a difference between arranging your business in the most tax-efficient way and creating transactions that merely exist to avoid tax. The complexity of the tax system is emblematic of such efforts to create loopholes, it is time for a new approach, one that allows more judgement to be applied.

Finally, I gave him the first word, so I shall give him the last.

‘We can’t solve problems by using the same kind of thinking we used when we created them.’ – Albert Einstein.

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All those people went to private schools? Really? The Sutton Trust is better than this.

Nik Darlington 11.02am

What do you like to do to celebrate a big milestone, a birthday or anniversary? Throw a party?

Or compile a list of lots of important people, tot up which schools they went to, and dress it up as a bit of serious research to get into the papers?

Enter stage left, the Sutton Trust. To mark their fifteenth anniversary, the education charity has scoured the depths of Wikipedia to give Times (£)readers the knowledge that David Dimbleby attended Charterhouse, Andrew Rawnsley went to Rugby, and Ray Winstone went to a grammar school (when they still existed). It is also covered by the Daily Telegraph (next to the now-obligatory image of young Etonians in tails, as though that’s how EVERY public schoolboy looks) and doubtless by others.

The Times has happily obliged the Sutton Trust’s hard work by putting together a colourful illustration of photographs and bar charts. I’m sure the newspaper’s editor James Harding (St Paul’s and Cambridge), not to mention leading writers Giles Coren (Westminster and Oxford), Brian Glanville (another Carthusian) or Hugo Rifkind (Loretto and Cambridge), to name a few, would have approved.

Dr Christopher Ray, high master of Manchester Grammar School, wrote for the Telegraph last week about the “demonisation” of private schools, by politicians and the media class (many of whom benefited from the brilliant education many of those schools bestow).

We’ve come to the point where the most important aspect of the new Archbishop of Canterbury’s character (note: character) is that he is an Old Etonian, just like those other toffs David Cameron, Boris Johnson, George Osborne and the vast majority of the Cabinet (okay I made the last two up, but because any number of journalists still can’t be bothered to check that the Chancellor went to St Paul’s or only a small handful of ministers are OEs, it doesn’t really matter any more).

Surely the more interesting thing about the Rt Rev Justin Welby is that only recently he was an oil industry executive? No. He wore a waistcoat and tails to school forty years ago. Got to be more important. He probably eats swan and hates poor people.

What the Sutton Trust’s ‘research’ demonstrates is a failing of basic education. That so many leading lights in British industry, politics, the arts and religion attended private schools is proof that those schools are preparing their pupils for certain careers better than the vast majority of other schools. Not Haverstock, of course, don’t you know Tulisa from the X-Factor went there? And the Leader of the Opposition?

The Sutton Trust would do better concentrating on ways to make all schools better, rather than sneering in language to suggest that private schools are invidious. As a line of debate goes, it’s cheap and it’s been overdone to death.

I’ve no doubt that the Sutton Trust has done wonderful things for social mobility in its fifteen years, produced countless excellent and thoughtful reports, and contributed meaningfully to the advancement of education in this country. But it’s better than this.

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Hezza’s magnificent mixed bag and other riveting news

Nik Darlington 10.03am

It is “thought-provoking” and “bursting with ideas”, even “good ideas”, so say Downing Street and the Treasury. There shall be a response in the Autumn Statement, so we’re told. Of course there will, Georgie; and I think last night’s EU budget rebellion was a fine old ruse too.

Lord Heseltine’s independent growth and competitiveness review has garnered a mixed bag of reactions among Westminster’s chattering class. Sky News calls it a “radical plan for growth”. The FT calls it a “radical overhaul”. The Independent describes at as a “highly critical report” that will “just provide succour to the Government’s critics”. The Guardian, always able to locate the grey lining, says it has the look of “a pamphlet produced by an enthusiastic amateur” and full of “reheats of discarded Labour policies”. It is, so one of their journalists writes, “destined for the long grass”.

Granted, the cartoon front-cover does give it the air of something released by one of those kill-joy, bumbling, tenured right-wing think tanks. Though behind the cover there are rich seams of thought and policy. The Times (£) lauds Lord Heseltine’s “ambition and action”, his “elixir of urgency”, particularly on aviation capacity, which does indeed need to be resolved more quickly, albeit not at Heathrow in my view; that newspaper also calls the review “an important step in flushing out a broad narrative for Britain’s future”.

Even ConservativeHome, setting aside their own ideological scruples, found a few bits of the review they liked.

Whatever you deem Lord Heseltine’s review to be (and many cuds have been chewed in the past 24 hours), consider it mainly as this: a classic ruse to create a space within which Downing Street and the Treasury can operate. By daring Tarzan to reach for the stars, George Osborne may hit the moon. This much is obvious.

Elsewhere, it has been a busy couple of days for politicians from this stable. The Sun reports Alistair Burt, foreign office minister, warning of the “real threat” of a nuclear dirty bomb being deployed against Britain. This at a time when concerns are resurfacing about Iran.

The abortion row shows no sign of abating as new health minister Anna Soubry signals no intention of changing laws or guidelines on abortion counselling. The Daily Mail is not amused, nor, for her two pennies worth’, is Nadine Dorries.

On Tuesday, new energy minister John Hayes unilaterally opposed the Government’s wind farms policy. The Telegraph's Peter Oborne writes today that he has “never come across anything quite like it in 20 years reporting politics”. Embarrassing, amateur, or just plain odd: call it what you will, Mr Hayes’ hysterics may have pleased some people, but it sends out a stupidly senseless hodge-podge of mixed messages to investors. This is the scenario spelled out by Mr Hayes’ predecessor, Charles Hendry, as reported today by the Times (£). A group of twenty Tory MPs has quite rightly written to the Prime Minister to complain.

And to finish, a little note of welcome and good luck to new Tory group, Blue Collar Conservatism.

Chaired by the MP for Carlisle, John Stevenson, and led by a broad-based advisory group consisting of Esther McVey (Wirral West), David Nuttall (Bury North), Martin Vickers (Cleethorpes), Philip Davies (Shipley) and Matthew Offord (Hendon), Blue Collar Conservatism aims to foster debate and generate ideas to ensure that blue collar voters remain at the heart of the Conservative party’s agenda.

The new group draws on the support of sixty-three Tory MPs, including the Chief Whip, Sir George Young; the new secretary of the 1922 Committee, Robert Buckland; and others including Damien Green, Laura Sandys and Robin Walker.

If the Conservative party is and always has been a coalition of parties itself, then Blue Collar Conservatism is an admirable cross-party initiative and I wish it well.

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Tories and Lib Dems should reaffirm their commitment to coalition, not drift increasingly apart

Nik Darlington 1.48pm

Well that was a pretty petty, squabbly piece of PMQs earlier. So instead of talking about it here, this is a heads-up for a speech being given next week by the chairman of the Health Select Committee, Stephen Dorrell.

Mr Dorrell, a former Cabinet minister and a patron of the TRG, will be making a concerted and forthright case for the Conservative and Liberal Democrat coalition.

First we were told that the coalition would fall apart within weeks; then we were told that the Lib Dems would not support strong policies to reduce the deficit; now the sirens are saying the Lib Dems will topple the coalition prior to polling day.

There has certainly been a growing apart. Cabinet ministers of the two parties have certainly taken on a renewed air of partisanship. Today, Nick Clegg makes a speech in the City of London claiming that his party has been reining in the Tories’ anti-business policies on immigration, energy and Europe (there’s undoubtedly truth in the first point, quite a bit in the second, and possibly so on the third). It is only the latest in a series of efforts at ‘differentiation’.

Like the fog sitting over central London of late, there is also something of a fog over the memories of many Tories (including MPs). The Conservative party did not win the 2010 General Election. Gordon Brown’s Labour party most definitely lost it. The Liberal Democrats most definitely did not win it. Yet nor did anyone else.

The Coalition, to give it a grand capital ‘C’, was the best solution to the muddled outcome given the dire straits the country was - and to some extent still is - in.

It still is the best solution. Not only that, it is the only solution. Remarkably too, it has been a historically stable solution. The most significant rebellions of this Parliament so far have been within the Conservative party itself, not the governing parties as a whole.

Dark Satanic Mills or Green and Pleasant Land?

Matthew Robertson 10.30am

If I asked you to describe a generic duck, you would probably say it had a white covering, yellow feet and a beak. 

Let’s imagine that there are rules for what a duck is and that those rules are the above. By this definition a dog covered in white with painted orange feet and a beak planted on it would be classified as a duck. Everyone knows it is a dog but the rules state that it’s a duck.

This illustrates how misguided playing by the rules can be. It is from ‘The Smartest Guys in the Room’, a book about the rise and fall of Enron. I will not go into the intricacies of the Enron scandal but it was their ability to manipulate the rules that led to their downfall, in particular accounting ones.

You don’t need to be a comedian to know that there are many ways individuals and companies can use tax rules to minimise their liability but there is less understanding of how national governments can ‘bend’ the rules to show a better position.

International companies adhere by International Financial Reporting Standards (IFRS), the main bedrock of these standards is a principal called ‘Accruals Accounting’ where economic events are recognised by matching revenue to expenses at the time in which the transaction occurs. As opposed to when it was paid or received.

Governments are not obliged to use accruals accounting and so are more susceptible to manipulation and because they do not have the same audit regulations, there is a lack of transparency. It is this lack of transparency that allowed the Greek government to hide its liabilities which were only revealed when the new government came in. In austere times the incentive to reduce the deficit is higher than ever.

One of the key methods to reduce a reported deficit is to keep liabilities off government books. The IMF mentions that when Eurostat (the statistical office of the European  Union) went through Greece’s accounts, it reclassified transport and other companies as belonging to the general government and so increased Greece’s reported debt by  €18.2 billion. It is not clear whether the difference would have been a deciding factor in allowing Greece to join the common currency area but it is clear that false reporting allowed the government to borrow more than it should.

Which is why I have been interested in the latest release of Whole Government Accounts (WGA) which were published on July 12th for the year ending 31 March 2011. As described by the Treasury:

'WGA is based on EU adopted International Financial Reporting Standards (IFRS), the system of accounts used internationally by the private sector, as adapted or interpreted for the public sector context, and is similar in presentation to private sector accounts. It complements the National Accounts figures, produced by the Office for National Statistics (ONS), by providing a set of financial statements based on standards familiar to users of private sector accounts.'

The release of the accounts to 31st March 2011 is only the second set of financial statements of this kind and so this is the first time that a comparison can be made between 2009/10 when Labour were in power and 2010/11 when the coalition came in.

The biggest number that hit me was that government borrowing and financing increased £126bn which reflected the need for higher borrowing whilst tax receipts fall short of public spending. Because of this, debt interest increased by £13bn to £44bn in the year. Despite the rhetoric of trying to tackle the deficit, these figures show how little was achieved in this respect in the first year of the coalition.

Most of that analysis has been well documented in the financial press but what about the dogs dressed as ducks?

The biggest differences between the government accounts and the WGA relates to public service pensions and Private Finance Initiatives (PFI).

Note 1.47 in the WGA:

"WGA is prepared on an accruals basis in accordance with accounting standards. It takes into account all future pension liabilities from the service already provided by past and current public servants. Therefore, WGA net liabilities include the net public service pension liability for public sector pension schemes. “

“There are similar differences between the WGA net deficit and the National Accounts current deficit in relation to: interest on pension liabilities of £47 billion which is included in WGA but not National Accounts.”

The other big difference is in the treatment of PFI, WGA records more PFI contracts as liabilities of the public sector than the National Accounts do. This is primarily because of the inherent subjective way of measuring PFI contracts. The main objective of PFI contracts was to transfer risk from the public sector relating to the operation of certain assets. Naturally, there will be judgements involved in determining the balance of risk and reward from each contract. One of the criticisms of New Labour was that they changed the calculation of comparing PFI to public sector procurement so that the risk assessment became far more subjective and arguably easier to manipulate.

The WGA tries to overcome this difficulty by recognising PFI contracts by judgements on the balance of control, as the subjectivity of control is a lot less than the subjectivity of risk.

The WGA accounts are far from perfect and they do not provide a complete assessment of the UK government’s fiscal position. It is not beneficial that the March 2011 accounts have only just been released and there will be probably be a number of adjustments once these figures have been audited. But they are an attempt at providing a greater level of transparency and to subject government to the same accounting rules that worldwide corporations adhere to.

The measurement of government success should never be restricted to how it performs on accounting/financial measures, a problem inherent in GDP statistics. But there has to be a consistent and reliable basis on which to judge how much money a government can raise and spend.

The UK is the first to try and attempt to consolidate the whole of the public sector on an accruals basis and it will be interesting to see how this will be received internationally. After all, no one wants to see a dog dressed as a duck.

Follow Matthew on Twitter @FlatFootTory

Despite slowdowns, economic stalemate between Europe and China is set to continue

Henry Hopwood-Phillips 3.44pm

Economic data from China is mixed. The bad news is that after first-quarter GDP growth of 8.1 per cent, second-quarter growth is being revised downwards from 9.5 per cent to 7.8 per cent by Caixin, one of China’s leading financial publications.

Reuters reckons second-quarter growth will fall even further, by 7.6 per cent, the weakest rise since 2008. Other indicators fare no better. Industrial production has risen by the lowest amount in three years, at 9.6 per cent. Electricity consumption fell to 3.7 per cent from 7 per cent in March. Property prices fell in over half of China’s seventy leading cities. And manufacturing PMI suffered its eighth consecutive month of contraction, from 48.8 in  June to 41.8 in May.

The second set of statistics paints a rather different picture. Exports were expected to clock a 6.8 per cent rise but instead surged by 15.3 per cent to $181.1 billion, mostly due to American demand. Not only that, imports only increased 12.7 per cent, giving a healthy trade surplus of around $18.7 billion. One of those imports was oil, which was bought at a record rate of six billion barrels a day in May due mainly to its low price and unstable future.

Bears point to a real estate bubble, over-capacity, over-investment, and a consequent lack of inflation as signs of over-extension. Bulls tend to side more with Jim O’Neill of Goldman Sachs who notes that the historical weight placed on production stats is misplaced and that “indicators of consumption are becoming more important”; and Jack Perkowski of Forbes who reckons “the phrase ‘property bubble’ will no longer be in the vocabulary” reasoning that it must have bottomed out after nine-months of decline.

The Chinese government, noticing a slow-down in demand, has not been slow in reacting. It has cut its interest rates for a second time. Consequently the yuan weakened against the US dollar in Shanghai.

Further measures are also being taken. The monetary authority is pumping 225 billion yuan into the financial system by conducting reverse-repurchase operations. The last steps to lower the amount of cash banks need in reserve, started in November and freeing up 1.2 trillion yuan for lending, are being implemented. And investment projects, many in the underdeveloped interior and western parts of the country, are being fast-tracked.

Beijing also hopes to boost energy demand by subsidising energy-saving white goods to the tune of 26.5 billion yuan. Such measures make a mockery of bullish claims that the Chinese government would intentionally try to cool the economy down in order to tactically restructure it.

China knows the oil that lubricated the post-war global economy is running dry. As the purchasing power of the Western consumer, based at first on rising wages but later on rising house prices has evapourated, no significant replacement has compensated for that lost demand. According to Bloomberg’s David Roseberg over 80 per cent of the world’s top economies are now posting a contraction in industrial activity. The EU and US together account for approximately 40 per cent of Chinese total exports but China knows that its long-term future lies with its own domestic consumer. This is why it has not been afraid to upset the laissez-faire apple cart by playing dirty with its currency, by using state funds to stockpile underpriced rare earths whilst imposing quotas and caps that ensure they remain in its domestic market, by refusing to “save” the eurozone, and by imposing duties worth £2.1 billion on US-made cars.

But the long term is naturally a long way off. Though there is talk in some quarters that the West needs to restructure its economy from a consumer-driven to an export-based one and that China needs to do exactly the opposite, the fact remains that the Chinese, with no real welfare state to speak of, are driven by both economic necessity and to a lesser extent culture, to save and supply rather than consume and demand. The West also has a tendency to overlook the old cronyist fundamentals of the Chinese economy which ensure the masses have little option but to stash their cash.

The fact is that much of the economy is still run on political rather than economical capital and that many bad debts are still sloshing round the system. Current generations are also living with the repercussions of the one-child policy legacy left to them by Xiaoping in 1979. They must save because demographically fewer and fewer people must support an ageing 1950s baby-boom generation.

In the short to medium-term the Chinese middle classes are not going to be either big enough or rich enough to fill the demand gap left by western homo consumericus and that gap remains unfilled by both BRIC and MIKT countries. This is the biggest single factor in the Chinese growth slow-down from averaging 10-13 per cent in the past decade to more humble 8-9 per cent IMF predictions this year.

But the Chinese have so far refused to invest in European customers who live in a eurozone that, according to Jin Liqun, Chairman of CIC, they believe to be profligate, lazy and politically undecided. China wants a eurozone to rise in its own image, with a freer market at ground level and a more centralised political command.

However, both seem unlikely to materialise and so, ceteris paribus, until one side blinks the economic stalemate looks set to continue.

Follow Henry on Twitter @TheHolySmoke