What did they think would happen? And what do they think will happen?

A year ago economists and the hapless Sunak government were optimistic about the UK economy. 

The end of 2023 had been miserable. High energy prices, persistent inflation, staff shortages causing problems everywhere and figures subsequently published would show that there had been a "technical" recession, with two successive quarters of falling GDP.

But by January the most optimistially deluded of the Tories felt that a golden scenario was in prospect: falling inflation leading to lower interest rates and rising real terms wages. Advisers suggested the economy was liked a coiled spring, ready to recover because of a combination of factors, with an outside chance of a victory in an autumn general election.

Now that outside chance was always a long shot and we may never know what on earth was in Rishi Sunak's mind as the wally without a brolly stood in the Downing Street rain calling an early general election. There was supposition that the economic outlook was negative rather than positive - interest rate reductions had been deferred by the Bank and maybe things were going to get worse rather than better.

They didn't actually get worse through the late summer. Inflation dropped to 2% (though it's gone back up a bit since) and growth was much improved at 0.7% in Q1 and 0.4% in Q2.  We'll never know whether a November election would have been closer, though one still couldn't imagine anything other than a Labour win. Just like in 1997, when the Tories had delivered 3 good years of an economy was going well, the electorate had long since made up their mind that they didn't want more of the Tories, even if there was nothing like the kind of love for Starmer as for Blair.  A couple of good quarters was never going to return Sunak to no 10.

However, at the start of 2025 there is none of the cautious economic optimism of a year ago. Growth was flat in Q3 - it fell in GDP per capita terms. Labour's mission for growth has stalled on the launch pad - indeed there are fears of recession. The cost of government debt (gilts) - the most important indicator of confidence in the government and the thing that sank Liz Truss - ended 2024 at 4.55% but has continued edging upwards and this week reached 5.4% for 30 year gilts, the highest rate since 1998.  For context the OBR projected rates 0.4% higher for 5 year gilts by 2030 as a result of the Reeves budget but we've already past that figure. 7% would be getting into Greece bailout territory.

The rate at which the UK can borrow matters because higher debt repayments on our mountain of public debt means higher taxes or less to spend on services. In order to maintain confidence the chancellor pledged to meet the latest version of the Treasury's "golden rules". At the time of her budget she had some £10bn of leeway, a figure the Institute for Government called 'small'.  The increase in rates has meant the leeway has disappeared. If rates go higher she would be forced to break her rule, cut services, or raise taxes. Raising taxes would break a promise from just a few weeks ago that the tax rises in her budget were a once in a parliament event and she wouldn't be back for more. Cutting services will go down a storm with the Labour left and result in lots of hand wringing all round. The Institute for Government said it was 'not clear' how Reeves would respond in the event of even a 'modest' revision to forecasts.

In the run up to the budget Mrs H and I commented to each other that Reeves looked as if she wasn't sleeping. We thought she was worried about the decisions in her big bang first budget. She looked even worse in the Commons this week:

There was a lot of crowing in the Daily Mail a few days ago about the situation the economy and Rachel Reeves find themselves in. To be fair, while the budget unsettled markets, this week's problems are more to do with the world economy, in particular the extra debt Trump's administration is likely to take on. It's a simple matter of supply and demand: more demand for borrowing pushes up rates. Lenders will generally see the US as the best risk, leaving other countries scrabbling around - and needing to offer even higher rates - to borrow as much as they want or need.

The bond markets have come to be seen as the primary factor in keeping the tendency of governments to borrow and spend in check, hence the term 'bond vigilantes'. Who are these vigilantes? Mainly everyday financial institutions like pension and investment funds. Your pension fund is highly likely to hold gilts, quite probably from several countries. They have no axe to grind politically and are simply trying to make good returns and manage risk for their investors. They aren't speculators like George Soros, who famously crashed the pound back in 1992. The bond vigilantes have become the ultimate protector of the financial probity of governments.

You can see from the graphic shown in the same Daily Mail article this week that there hasn't been a sudden loss in confidence in the UK. Yes, since Reeves's budget, rates have been similar to those immediately after the kami-Kwazi Truss budget, but not as the result of a spike as happened then, just an inexorable increase as markets adjust to the international situation:

The Mail's gleeful comparisons with Truss-Kwarteng debacle are way off beam. Gilt rates now are higher than then, but the margin over short term interest rates is small, with Bank rate currently 4.75%. In contrast under Truss 30 year gilts, at 4.8%, were a whopping 3% more than the then Bank rate. She pushed the gilt rate up by 2.5 percentage points - doubled it pretty well - and the sterling index (the pound's value against a basket  of other currencies) plunged 12%, whereas it has been relatively stable of late and is stronger since summer. 

False news in the Mail? Well the facts are right, it's the inference that's clearly incorrect. I'm not sure what the right phrase is for ignorantly - or deliberately - drawing the wrong conclusion. False news doesn't really fit - deception, misrepresentation perhaps? How about hoodwinkery? (Yes of course I just invented that).

So I have some sympathy for Reeves. But not a lot - much of what is happening was entirely predictable. And she did leave herself little wiggle room, when she could have held some comittments back. Like bunging the train drivers a big increase when they're already paid around twice their equivalents in France and nearly three times their equivalents in Spain, for example. 

So no golden economic scenario in prospect for her and Starmer. The latter of course is already significantly tarnished in the eyes of the public by the pensioners' winter fuel allowance cut (I expect this story to keep running with the current cold snap) and the rows over freebies for suits, glasses, gig and football tickets.

There are other indicators of economic problems. Not long ago there were a lot more vacancies than unemployed. But now there are only 1.8 people unemployed for every vacancy, almost what it was before the pandemic. The number of vacancies has fallen 29 months in a row. The boss of one employment agency called this a "slow motion car crash" and a sign of impending recession. "When I've seen this before, that's what's happened". And this is before the employer's NI increase kicks in, in April.

What I'm wondering is why on earth Reeves and Starmer thought giving a weak but convalescing economy one of the biggest kicks possible in the budget would do anything other than make businesses pause investment and recruitment plans. With tax already at historically high overall levels her budget was one of the biggest tax raising budgets ever. £40bn of new taxes made it bigger in real terms than Lamont's post ERM crash 1993 budget and much bigger than anything Brown or Osborne did. It also provided for significantly higher borrowing as well, £30bn of it. £70bn a year of extra spending, £40bn of it on day to day services and the rest increased capital investment.  Even the Guardian said it was a return to tax and spend on a massive scale, pushing the UK towards European levels of spending.

Which was like giving the economy a huge kick in the nuts while force feeding it a Red Bull sugar and caffeine rush. No wonder it has stumbled around feeling sick.

A lot of attention focussed on how Reeves chose to raise tax, mainly the employers NI increase. Large companies can deal with it. They can generally pass on costs in their prices. The multi-nationals are looking at which country to invest in, have long term plans and can be reluctant to change course abruptly. But the larger part of the economy, small and medium sized businesses, are in a different boat. One can't blame them for pausing while they see how they can get through what will, for many, be a difficult time. 

I've always felt Labour is happier dealing with big companies. They have a better understanding of that culture, with unions, collectively bargained pay and economic regulation. In contrast they've always seemed to me to have little or no understanding of why someone would start a business or go through all the hassle and risk of trying to grow it. At their heart they are more comfortable with a socialist collective type of economy. Add your own adjectives, such as sclerotic, perhaps.

I don't actually expect the economy to shrink, at least not significantly, despite Reeves's well aimed but badly thought out kick. For a start, the public spending increases in the budget will increase GDP in the short term. This is why the OBR's budget forecasts showed a bit of a short term increase in growth, followed by it weakening later in the parliament as the spending increases work through and the growth depressing impact of the tax rises is felt. I think it is more likely to stumble on, flatlining. Maybe Ed Balls can reprise his much used but then incorrect gesture from a decade ago, false news at the time. But now there's the danger of inflation remaining stubborn or even going back up a bit, risking the scenario known as stagflation.

Meanwhile in other areas than the economy Labour is already setting out on courses of action which will steadily erode the precious few gains and improvements made under the Tories.  The best example of this is education where Bridget Phillipson risks undoing the gains made in education not just under the Tories but the previous Labour governments as well. Somehow education was a notable success for the Tories over the last decade with large improvements in our position in international league tables for literacy, numeracy and science despite significant real terms reductions in funding. 

Controverially perhaps I feel much of the credit for this lies with Michael Gove. While that might be a name one hardly dares mention to any current or former teacher, the evidence is clear, though the credit is far from entirely his. The main reason, in my view, is that education has not been a political football since Richard Baker, Thatcher's education secretary in the late 80s, introduced the national curriculum and the "Baker" training days now known as inset days. As an aside, wasn't it astounding that teaching had precious little of what became known as continuing professional development before that? I recall the odd teacher going off for a sabbatical but keeping up to date back then seemed to be entirely ad hoc. From Baker onwards successive Tory and Labour education secretaries have built on their predecessors achievements rather than changing course. Labour introduced academies, now it threatens to water them down.  Phillipson, in thrall to the producer part of the process (i.e. in this case teaching unions), has set out on a path which is likely to erode these various achievements as well as being, in what folk had been saying was an out of date phrase but seems to have gained fresh legs, utterly "woke". I'm referring, of course, to decolonising the curriculum (there wasn't much colonialism in what I was taught in the 50s and 60s for God's sake - just teach history, warts and all and keep contentious takes like critical race theory out of it).  Though taking the decision to put schools into special measures away from Ofsted and giving it to civil servants probably presents greater danger.

Things have gone quiet on watering down industrial relations legislation (but it will come back) and of course we have the dogmatic pursuit of a net zero electricity grid by 2030 which no genuine expert thinks is any other than 'challenging'. Having had to be told by the US to ditch Huawei from our telecomms system we're now thinking of putting Chinese stuff in key elements of our disaggregated, renewables dominated grid. But don't worry, I expect periods of dunkelflaute (a German word for periods of windless, cloudy days in autumn and winter) are more likely to crash the grid in coming years.*

This scenario, with a limp and unenthusiastic economy, large pay rises buying off strikes with no reform or efficiency strings attached and things that work replaced with what the providers prefer to dish up is broadly what I feared and why I didn't vote for Labour in the last election. 

There are grounds for hope that Labour will prove incompetent at delivering damaging change. It's remarkable that so early in Starmer's term as PM he picked up the whinge of previous ineffective PMs and ministers by saying that the levers of power weren't connected to anything and the civil service was getting in the way. The difference this time was he then had to back down after the civil service unions complained. I'm sure the civil service and other elements are obstructive at times, Michael Gove's blob etc. But I've also always thought that ministers don't understand that, in many areas, the civil service is there to formulate policy, not to implement things in practice. Which is why bodies charged with doing that, like the NHS, exist. Those levers in many areas don't connect to anything because they never have.

A few ministers do understand that. Unfortunately, not the right ones. “The only minister who really knows how to work the system and get officials delivering what he wants is Ed Miliband, who has been there before,” a colleague of the climate-crusading energy secretary told Tim Shipman of the Sunday Times**. “And Ed is the one minister we don’t want to be a success if we want to win the next election.” 

There is grave concern about the economy flatlining and few Labour advisers now privately defend the decision to deny winter fuel allowance to all but the poorest pensioners. “The political mistake they made was in conflating toughness with strength,” the party veteran said. “They wanted to look strong, so they tried to act tough. But when you beat up on poor old ladies, you just look like a bully.”

Wes Streeting, the health secretary, is the government’s best communicator, but the source said: “Wes always knows what to say, but it’s unclear yet whether he knows what to do.”

Until they figure out the right rather than wrong things to do, let's hope that's true. 

Some of the above draws on David Smith's column 'The coiled spring economy that failed to bounce back' in the Sunday Times on 29 December 2024, though he didn't quite as directly link it to Reeves's budget or use analogies like a kick in the nuts. The comment on the implication of a long term fall in vacancies also came from the Sunday Times business section. Smith's column this week was called The bond vigilantes are back - and that's no bad thing (12 January). I'd already written my paragraph on their significance by then but his helpful summary of the movement in bond rates meant I didn't have to look them up. 

Other sources:

Rachel Reeves' first budget is a clear break from the recent past, The Institute for Government review of the budget, was published on 30 October 2024. Note to their editor: it really should be "Reeves's budget"

Rachel Reeves goes back to the future with a tax and spend budget. The Guardian 30 October 2024

* Wind was our biggest source of generation in 2024, providing over 30% of our electricity. When I worked in energy economics 40 years ago we already knew that wind was the most practicable and economic of the renewables. However we also knew that guaranteed supplies were needed as renewables are intermittent. On some cold days earlier this month wind contributed a tiny fraction of its theoretical capacity, just a few percent of demand. Officials denied we were close to blackouts but there wasn't much resilience for, say, our biggest single source of supply (the interconnector with Norway!) dropping out. A Scandinavian politician had a vivid comment on Germany's energy policy with its over reliance on wind with insufficient base load generation which caused problems across northern Europe recently. He called it 'shit'. I doubt Ed Miliband will take note.

** Politics is notable for party colleagues also being rivals. The delicious and indiscreet quotes from Labour 'colleagues' are from Tim Shipmans's column '2025 will be a political shoot out. Which leader has most to fear?' in the Times on 4 January. This column also explained for me the debacle of the Tory leadership election. James 'not so' Cleverly was favourite to win it until, many believe, some of his supporters tried to fix who would be his opponent in the final run off. Cleverly’s camp think four of his supporters voted tactically for Badenoch, to keep Jenrick out, while Jenrick’s team believe one of theirs voted for Badenoch to keep Cleverly out. Without those votes switching, the run-off would have between Cleverly (42 votes) and Jenrick (40), with Badenoch (38) eliminated. D'oh, they're too incompetent to even frig their own leadership election!

Can the inflation genie be put back in its bottle?

This is the promised/threatened third in my trilogy of posts on the economy, this time on inflation. It strikes me that no-one less than half way through their career will have experienced significant inflation, while those of us who lived, worked and had a mortgage through the 1970s remember all too well what an economy in its grip feels like.

For myself and Mrs H it wasn't all bad, indeed rather the opposite. We bought our first house in 1975 with a mortgage at an interest rate of 11%. There were 18 changes of interest rates over the next 18 months when the rate peaked at 15%*. This could have been very tough as I had fibbed just a little on my earnings to secure the necessary loan, saying that the overtime shown on my payslips was guaranteed, which it wasn't. We also started off with no washing machine, three handed down armchairs and a home made coffee table. We had a dining suite donated to us by Mrs H's grandmother but nowhere to put it as the carpet in the living/dining room stank of cat pee and had to be thrown out. We couldn't afford to replace it for many months. We had a rented TV but the house never did have central heating while we lived there. I know, I know boxes on us feet, violins etc.

But this was an era of a wage-price spiral and we were on the right side of it. It was a time of government price and wage controls, introduced by Heath's Tories, which Labour changed to voluntary restraint in its "social compact" with the unions after the elections in 1974. I recall getting a satisfactory pay rise at my first ever annual pay review in April 1974 (I still have the letter - it was 11%). We were all pleasantly surprised when, in October, pay letters were issued out of the blue and I got a further 20%! The company had acted because it was concerned that formal pay restraint might be brought back in and that it could be trapped with uncompetitive wages (one of the reasons pay controls don't work). Things went on in much the same way: in the 12 months after we took out the mortgage my pay went up by 50%. Mrs H did even better - hers doubled, by the simple tactic of getting her annual pay rise and then moving job for a further rise to a company that had still to make its annual adjustment. In three years as well as my annual increase I had a further three pay rises thrown at me. I was of course in the early stages of my career so this included some significant progression as well as annual rises but looking back those percentages look extraordinary.

When we took out a bigger mortgage to move house in 1980 I recall saying to Mrs H that the recently elected Mrs Thatcher had said she was going to kill inflation and noting "that might not actually be good for us right now, we need this mortgage whittled down by pay rises. But it won't happen". (It did, but not quickly, fortunately for us. And then they caused it to surge back. It wasn't really fully under control in the UK until the 1990s. See Was the Tory reputation for competency a myth? from 30 October).

So this all seemed hunky dory to us but it wouldn't have been so great for many others. And so, in different circumstances, with retirement looming and with it the end of annual pay reviews I've been concerned about the risk of high inflation returning since the 2008 financial crisis. I instinctively thought that the mysterious smoke and mirrors of quantitative easing might actually equate to old fashioned printing of money. Oh, I understood the theory alright - that the central banks were acquiring assets which could later be sold, so there was a sorely needed injection of liquidity without a one way irreversible injection of cash. But would it actually work that way? It did and inflation remained low, with interest rates held down at historically low levels for so long that people under about 40 had never known any other financial environment. 

I eventually concluded that everything was probably going to be ok, though also that I would be happier once the QE process was reversed and the assets sold back into the market, a process known as quantitative tightening (QT). And also with some residual nerves that a large debt hangover from the enormous budget deficits we had run always tends to supress growth.

But then we had a global pandemic, resulting in even larger deficits and higher debt and deferring the start of QT. I suspected that the re-opening of the world economy after the massive perturbation of covid and its lockdowns would stimulate inflation.  It seemed inevitable that there would be huge disruption to supplies while demand could jump quickly back to previous levels. Or even higher as companies tried to rebuild stocks. We also had the effect of what in the USA became known as the "great resignation" as lots of people decided they quite liked a different work-life balance or that they could get by quite happily without going back to their old, inconvenient or uncomfortable job and would rather do something more congenial, even if it paid a bit less, but allowed them to spend more time with their families or just doing more of what they wanted. Millions disappeared from the workforce in the USA, UK and Europe. Supply chains were disrupted in many ways and for many reasons.

When demand switched back on, the price of shipping went through the roof and shortages put a traditional upward pressure on prices in line with the only other immutable law besides the second law of thermodynamics (i.e. the law of supply and demand) it seemed inevitable to me that inflation would return. 

So I snorted when the US Federal Reserve pronounced that inflation would be "transitory". I could see the argument that things would gradually return to normal: the savings many of the more fortunate had built up would be finite, stocks would be rebuilt and demand would return to more normal levels. But I was concerned that a wage-price spiral might take hold, especially when I read that some unions in the USA were only accepting wage settlements if they included COLA provisions: automatic cost of living adjustment contingent on the level of inflation. This is a step on a behavioural slope which says things like "buy now, it will only be more expensive next month". 

This of course leads to demands from relatively well paid folk like train drivers for inflation linked pay rises which, when you think about it, amounts to letting the devil take the hindmost. The rail sector is state subsidised so their larger pay rise reduces the amount of money available for other things like protecting benefits**. When times are tough there may be falling living standards for a while and surely the better paid should not be protected in those circumstances. I include the about to strike nurses in that too (their pay is above average for the UK).

Moreover, since the Fed made it's eventually retracted prediction about the inflation surge being transitory, Putin's invasion of Ukraine caused a dramatic increase in what were already high energy prices post-covid as well as intefering with supply chains for fertilisers and staple foods. And President Biden has chosen, as Irwin Stelzer put it, to pour petrol on the fire by launching multi-trillion dollar spending programmes on an economy unable to meet the current levels of demand, while the Fed directs a water hose at the market.

I paint a bleak picture but I accept I may be being pessimistic as inflation does appear to be levelling off or falling in the USA and that may be a harbinger for western economies in general. Irwin Stelzer noted a month ago that trans-Pacific cargo rates were down 75% from last year, for example.

But I remain uneasy that the Truss-Kwarteng special financial operation deferred the start of the Bank's quantitative tightening. It has since started but at a tiny level, only 99.9% still to go. The days of Trussonomics were brief but it did introduce us to the odd situation of the Treasury trying to pump up growth by fiscal loosening while the Bank tried to damp down the econmomy by monetary tightening. While this seemed strange it's an artefact of having an independent central bank and wouldn't seem unusual to the Americans for whom the opposite policy directions being taken by their administration and central bank noted above are not unprecedented.

And the cynic in me doubts the resolve of western democratic governments to take the unpopular decisions necessary to quell inflation quickly. Ian Cowie opined recently that the massive debts run up by governments around the world to prevent the coronavirus prompting a global depression can never be repaid because electorates will not vote for the necessary spending cuts or tax hikes, but inflation offers a stealthy way to reduce the real value of the debts in what amounts to a slow motion bank robbery, where the victims are risk-averse savers. A bit like my mortgage getting whittled away by inflation in the 1970s.

Stelzer is more optimistic; he thinks the good news trumps the bad. He says every ill affecting the USA is man-made, created by a policy error. America contains all the oil it needs if it would allow it to be drilled for. It can reduce its deficits if its politicians decided to do so. It has a large entrepreneurial class capable of producing the answer to global warming, is a magnet for the world's best and has a military that would make enemies tremble "if they thought we knew how to use it". All that needs to be done is to do as Nike advises - "just do it".

I wish I was as confident that Sunak and Hunt could be free in a single bound. It looks a bit trickier than that to me. I expect they will try to balance the political unpopularity of tax rises and spending cuts with the need to restore the public finances and go only as hard as they dare. I can but hope - probably in vain - they will make clear that everyone who is in the better off half of the population (like train drivers, doctors, nurses and teachers for a start) will have to feel a bit of a pinch. As they won't be that brave, inflation will reduce but maybe only gradually, running the risk that it gets entrenched. But hopefully not like it was in the 1970s. 

Back then, of course, we also had energy crises. If energy prices stay at current levels inflation will fall back but there will still be a lot less money for everything else because we'll all still be paying a lot more to heat our homes. The rate of inflation isn't the only thing that matters, actual cost levels do also.

Fair warning: I've been meaning to write about energy for quite a while...

* No, I don't remember this in detail of course, though I do remember that our first mortgage had a double digit interest rate. The rates recommended by the Building Societies Association from 1939 to 2013 are available from the BSA (https://www.bsa.org.uk/BSA/files/5c/5c180498-5e52-4a41-b022-5821c25f3cbd.pdf)

** I realise the rail dispute is also about "protecting jobs". But rail travel is down, why should all rail  jobs necessarily be protected?

Irwin Stelzer's weekly American Account column appears in the Sunday Times.

Ian Cowie's Personal Account column on investing appears in the Sunday Times Money section.

Mr Bond I presume

This is the second of a trilogy of posts (how pretentious, sorry) primarily 'inspired' by the current economic situation. It follows on from my question Was the Tory reputation for competency a myth? (30 October) in which I pondered the oddity that Truss and Kwarteng overlooked Mrs Thatcher's tenet "you can't buck the market". When they tried, sterling and interest rates gave cause for concern but it was the the bond market that bucked Kwarteng out of the saddle. A further factor was the crisis that hit finally salary pension schemes necessitating a Bank of England intervention, where they promised up to £65 billion to buy back government bonds and prevent a 'doom loop' of selling but with a short end date to focus the minds of the politicians on regaining sanity. In the end 'only' £19 billion had to be spent on this emergency form of very specific quantitative easing and the crisis dissipated.

So why are bond markets so important and powerful that they can force a change in government policy when a mini-sterling crisis didn't? Bond markets are normally very boring but one can readily understand why a government like ours with high debt and needing to continue borrowing at a high rate would have a problem if the bond markets jacked up interest rates or, in the limit, even declined to lend. Nevertheless I found an article by Jill Treanor in The Times informative.  She noted that historian Niall Ferguson claimed that two hundred plus years ago at the time of Waterloo Nathan Rothschild was as important as Wellington to victory as he had backed the bond issue that funded the British war effort. During the 23 year war with France Britain's debt had doubled to the size of the economy - roughly where covid has taken it to - and Rothschild became so influential it was believed he could dictate which ministers were hired or fired.

The bond market was also critical in the US Civil War. The confederate states issued bonds linked to the price of cotton, their mainstay crop. At first the price of cotton rose and the value of the bonds rose with it. But they fell when supplies came in from other countries. The effect on the confederate states was ruinous. They printed more money which fuelled inflation and the confederate dollar, which was a promisory note with no assets behind it, collapsed to a value of six cents in gold, becoming worthless in defeat.

In more recent times American economist Edward Yardeni coined the phrase 'bond vigilantes' to describe investors who sold US government bonds in an attack on the Federal Reserve's policies. By the 1990s Bill Clinton's campaign manager James Carville quipped that, rather than the president or pope he would choose to be reincarnated as the bond market because 'you can intimidate everybody'. This was after the bond market caused Clinton's ambitious spending plans to be reined back which was fortuitous for the administration as it set the scene for sound economics and the legacy of strong growth which is very much part of the positive element of Clinton's reputation.

In normal times governments issue bonds, investors buy them as they are amongst the safest places to put money, and the rest of us don't notice. How can this market suddenly exercise so much power? Knowledgeable readers can skip the next bit (or critique where I've over-simplified it). Say a government has issued loads of bonds at a face value of £1 yielding 2% i.e. paying a 'coupon' (interest rate) of 2% a year for a period of maybe 10 years. Having bought these bonds, investors don't have to keep them, they can be traded so have a price which can vary up or down. If uncertainty arises, for example because higher inflation threatens to reduce the value of the returns (and the £1 when it is eventually repaid) or in the limit because the market thinks the government might default on its payment obligations, the value of the bonds will fall. As a simplistic example if the value fell to 50p that 2% interest rate on the face value of the bonds would become worth 4% to someone buying the bond at the new price. Even if the Bank of England didn't change base rates interest rates in the market would be affected. The interest rate at which the government could issue new bonds would have to increase - why buy bonds paying 2% when you could buy them yielding 4% and get more money back at the end? (You'd be be buying at 50p and expecting to get back £1 at the end of the term). Only governments that didn't need to borrow would be unaffected.

The bond markets are entirely dispassionate in wielding this power. They have long since not been driven by a single person with the influence of Nathan Rothschild and there is no political dogma driving the many individual decisions that underpin a market shift. All that matters is whether decision makers think their money (or the money of the investors like pension funds they are charged with growing) is safe and earning a worthwhile return compared with other options available to them. When the market ditches gilts it is expressing a view about the future probabilities of inflation and default. Foreign sellers are also expressing a view about the future exchange rate of sterling. Kwarteng's pronouncements led to a step change in those views (fears?) of the future. As Treanor noted it was puzzling that Kwarteng, a graduate in classics and history with a PhD in economic history, seemed so ignorant of the need for a chancellor to have the confidence of the market, especially the bond market.

All that seems pretty obvious, if not to Kwarteng and Truss. But returning to the pensions problem, I wondered why that was so acute to need urgent Bank intervention. Oliver Shah noted that the blow up in defined benefit schemes had been caused by their exposure to "liability driven investing". "Eh, what's that?" I thought, feeling a bit dim but, reading on I smelt a rat. Shah noted LDI is a "leveraged product designed to juice up returns without equity risk". He said a small number of voices had flagged that it was an accident waiting to happen, but it still seemed to take institutions by surprise.

I'm very familiar with the way defined benefit (DB) aka "gold-plated" final salary schemes work. They have three-yearly reviews to show that they can meet their future liabilities to pay out to their pensioners. These reviews have often meant misery for the companies behind the pension schemes for around 20 years now as what the individual employees pay in is specified and so the companies have to pay more in to make up any shortfalls between projected assets and projected liabilities for the scheme. They also have to have enough ready cash to meet the monthly cost of pensions in payment going forward. They usually invest in a wide range of assets but with a mix between equities (for growth) and bonds (for certainty) together with smaller proportions of other assets such as property and commodities. This mix gives an automatic degree of hedging against many scenarios. Normally the performance of equities and bonds are inverse correlated: when one group is doing badly the other tends to be doing well. But not always. Commodities, gold being a classic example, are often poor investments in terms of returns but when times are tough and equities and bonds are under-performing, money often floods into gold, boosting its price. It's rare that an ill wind blows all parts of the market no good. This is all well known, of course, and is the basis for spreading risk in a portfolio. 

One of the particular risks defined benefit pension schemes have to contend with is inflation. Depending on how their pensions are indexed they can have to pay out a lot more in £  than expected for the money employees and pensioners have already paid in. This is why DB schemes can be extremely expensive and as rare as hen's teeth outside the public sector*.  But LDI is a product, something that these pension schemes buy to manage risk (or, per Oliver Shah, "juice up returns"). How come I hadn't heard of it? 

I felt better a week later when I read Ed Conway's column. A veteran analyst called Albert Edwards (must be veteran with a name like that!) said:

Before this I had no idea what LDI was. And I've worked in the finacial market for more than 40 years."

He went on to say:

But that misses the point. When you have QE and low interest rates people do stupid things. They build up structures on the back of low volatility. Then, when you get a bit of volatility and rising interest rates, suddenly you're in trouble".

The trouble the DB pension schemes hit was actually remarkably simple. The first thing to be clear about is that Liability Driven Investment is not a strategy, it's a product sold to pension funds by asset managers such as Blackrock, Legal and General and Schroders. It's a kind of insurance to help pension funds balance their assets and liabilities against unexpected moves in the markets and ensure they have enough cash to meet the payments they guarantee to their pensioners. There was £1.6 trillion tied up in LDI by 2021, which sounds a lot but is actually a small part of the assets of these pension schemes. That was part of the puzzle - the overall funding of the schemes was never prejudiced. This was a classic liquidity/cash flow crunch, just what the LDI product was supposedly created to avoid. How come?

The pension funds have to post collateral (readies effectively) against their LDI derivatives in case they turn sour. The amount required rises and falls with the value of the underlying assets which the derivatives track. Interest rates had been steadily inching up in a well signposted way for months, requiring the funds to cough up more collateral but over a time period that allowed them to find the money. But when Kwarteng launched what he denied was a mini budget (so let's call it 'special financial operation') bond rates soared over a few trading sessions. This surge triggered emergency collateral calls on pension funds in a matter of hours. They struggled to find the cash and had to flog whatever assets they could get their hands on to sell quickly. I read about traders frantically liquidating assets, without even having a certain price, as panic set in. Ironically one of the assets they could sell was government bonds, putting further pressure on their price.

The good news is the Bank's intervention worked and the pension funds are no less healthy overall than they were. The bad news is that the markets remain jittery, there's a colossal amount of debt around post-covid, interest rates are increasing at a speed and scale unseen in many years (probably never seen by any traders under 45) and there could be more unexploded bombs lurking beneath the surface of the financial system. No-one is sure where the next one will detonate. Complacency has grown in financial markets as central banks have nearly always come to the rescue over several decades since the US Fed intervened to save a compnay called LTCM (Long -Term Financial Capital Management) in 1998 - another derivatives fiasco I think. This is the problem known as a lack of 'moral hazard' which encourages too much risk taking.

Which is one of many reasons why too much debt is a bad thing and Kwarteng and Truss were foolhardy in the extreme. "Liz Truss accelerated something that was already under way" one expert told Ed Conway. The reckoning was already coming but her ineptitude accelerated it. Like anyone whose credit card has maxed out you can't go out on a spending spree and getting that debt properly under control will take a long time and will constrain options in the meantime. 

Which is Rishi Sunak's 'profound economic crisis'. More on that and, in particular, inflation in part III.

* Actually some very clever actuaries managed to prove to the government actuary in the mid 1990s that inflation proofing pensions need not be prohibitively expensive. The public sector corporation I worked for was accordingly privatised with employees having the option of retaining a fully inflation-proofed pension. Within 5 years the employer's contributions had soared from a "holiday" level of 4% through the 7.5% standard rate to 11% and beyond. Within another decade the company had collapsed and the pension scheme had to be bailed out by the PPF. Beware very clever people! 

Sources: (besides my own sketchy and unreliable knowledge):

Political leaders can never outwit the bond titans. Jill Treanor, The Times 15 October 2022

Incompetent Truss has thrown the Bank's big sexy turtle a lifeline. Oliver Shah, Sunday Times 16 October 2022. (Andrew Bailey's predecessor, Mark Carney, dubbed him the big sexy turtle if you are wondering. No I don't want to think about it either. Shah says Bailey has a hapless quality that led a seasoned investor to say "if he can find a dog turd, he just stands in it".  That's as maybe but he's had a better time lately than the government or pension fund managers.

The debt timebomb that blew up Truss. Ed Conway, Sunday Times 23 October 2022. This was the latest of many impressive columns by Conway, Sky's economics editor. He is proving a master at explaining issues from this one to how to get to net zero in understandable terms. But I still had to look up the next source to confirm that LDIs are like insurance.

Explainer: what is LDI? Liability Driven Investment strategy explained. Reuters, 12 October 2022

Was the Tory reputation for competency a myth?

I've been trying to get my mind around the way the Conservatives have lost their reputation for being sound economically and generally competent, at least to the standards of piss ups in breweries. As someone who is instinctively suspicious of political dogma of the left or right that has been the major reason I have tended to vote conservative in elections for a long time now. This susceptibility to chaos started gradually under Boris Johnson before going to warp speed with Truss and Kwarteng. 

Sure, all governments make mistakes which become apparent sooner or later. But, for example, George Osborne's "omnishambles" budget in 2012 was trivial - a picnic in comparison (literally, as the main bit that unravelled was dubbed the "pasty tax"). 

The fundamental objective of the Truss/Kwarteng strategy (if it deserves that name) was laudable - growth. Without growth the ever increasing demands on the public purse, driven partly by the inevitability of demography, will not be fundable. But that doesn't mean you can just do what you've always wanted to, irrespective of the prevailing circumstances. Truss's comment that they went "too far and too fast" was quite an understatement. The immediate loss of market trust was the sort of thing one might have expected to follow John McDonnell's first budget, had we ever been unfortunate enough to experience it, rather than that of a Conservative chancellor.

One thing I found very odd were the references to Margaret Thatcher as a tax cutter. When she got the opportunity, yes, but Thatcher increased taxes at the start of her reign, as was required to get the public finances on a sound footing. Kwarteng and Truss seemed to forget one of the Iron Lady's best known quotes: "you can't buck the market". Thatcher's tax cutting came much later, mainly when Nigel Lawson was Chancellor. And you can argue he also went too far too fast. Lawson admirably simplified the tax regime, but his cuts to the basic and upper rate of income tax in 1988, together with artificially low interest rates as he followed the flawed strategy of shadowing the German Deutschmark at his preferred rate of 3DM to £1 in the EU's Exchange Rate Mechanism, created a housing boom and then a bust which led to higher inflation, lower growth and the recession of the early 1990s*.

So, then, does my long held belief that the Tories are more economically competent actually hold water? After all, the last time a Tory government went unconditionally for growth a bust followed. That chancellor was Anthony Barber in Ted Heath's government. I recall seeing a cartoon in a newspaper at the time that showed Barber holding up his budget red box and saying "boom!" followed by the same again, representing his next budget. In the third frame the red box went boom and in the final frame Barber was left, charred and clothes in disarray, holding the remnants of his exploded red box. 

Older readers will know that this presaged the start of a very difficult era in British politics: two general elections in 1974 narrowly won by Labour, soaring inflation and the need for a bail out by the International Monetary Fund in 1976, with cash limits imposed on the spending of government departments. The supposed austerity of the Cameron coalition government was minor in comparison.

It was Labour who lost what reputation they had left for economic competence as a result of the IMF bail out, after it was badly dented having presided over an ignominious devaluation of sterling in 1967. Yet in the meantime they had surprisingly lost the 1970 general election, handing on to the Tories a healthy economic picture after Chancellor Roy Jenkins repaired the situation, presiding over the only UK annual budget surplus between 1936 and 1988. Jenkins was blamed by Labour supporters for an overly cautious neutral rather than giveaway budget only 2 months before the 1970 election.

Labour didn't regain the electorate's trust until 1997, with Blair and Brown. They inherited a strong position from John Major and Ken Clarke, though they had the good fortune that Lawson's dalliance with the ERM, continued under Major and Norman Lamont, had ended with a even more sudden switch of policy than the transition between Kwarteng and Hunt. On "Black Wednesday" in 1992 the markets forced sterling out of the ERM but not before the government had attempted to buck the market by hiking interest rates from 10% to 12% and then farcically to 15% in one tumultuous day.

The fact that Black Wednesday became known as White Wednesday to many, as it was the catalyst for a change in policy which paved the way for 15 years of steady growth until the 2008 financial crisis, was overlooked by the electorate, who decided that the Tories had lost their economic marbles (as well as over £3billion trying to maintain sterling in the ERM) and Labour duly won the next three elections. The role Black/White Wednesday played in the growth of Tory euroscepticism is, I believe, very significant.

There are some lessons from these various crises in our recent history, most of which feel more serious than the current situation, branded a 'profound economic crisis' by our new PM in what I take to be an attempt to manage expectations. Devaluing the pound when you said you wouldn't; having to call in the IMF; trying to sustain an untenable currency rate in a sham (or at least virtual) pre-euro and being made to look idiotic by the markets all made the party of government look foolish and led to a change of government at the next election. The financial crisis of 2008 is perhaps a bit different: Labour's spendthrift policies in its third term coupled with weak regulation left the UK more vulnerable than most to the global recession that followed but that government was arguably less culpable than the other examples. They still got kicked out. On those grounds the Truss/Kwarteng fiasco looks very bad for the Tories and good for Labour.

But what about my feeling that the Tories are generally more competent? Jenkins pulled the situation round but Labour still lost. Barber blew up the economy and the Tories lost narrowly but the seeds of the inflationary seventies were laid. Labour still got the blame, though arguably they didn't do the right things to avert disaster between 1974 and 1976. Lawson also blew up the economy, but the Tories faced a weak opponent, got back in, made asses of themselves, pulled the situation round and still lost. Labour left us vulnerable to the 2008 crisis but were arguably unlucky. Truss alarmed the markets so much she didn't get the chance to do much harm**. However they still looked like idiots who didn't know what they were doing.

External factors should not be forgotten in the above history lessons: the current energy price shock is the biggest since the oil crises of the 1970s, which were material to high inflation rates around the world but this time the energy shock is combined with a war affecting one of the world's most important areas for food and fertiliser production. The sub-prime and banking crisis of 2008 wasn't of Labour's direct making. Events dear boy matter and governments tend to get punished, culpable or not. 

But not always. The Tories were re-elected with an increased majority in 1959 only two years after the ignominy of the Suez debacle***. So I expect Sunak will feel 2024 is all still to play for and Labour can't assume that they can rely entirely on government unpopularity and 'time for a change' to win. My current hunch would be that, despite Labour's large poll lead, it might well be close, with neither party held in much affection by the electorate. 

After all, the Tories curently look idiots but Starmer has still to decide what a woman is. This isn't the first question Starmer has struggled to come up with an answer for. So, even if he ever reaches an answer, he won't seem the sharpest tool in the box come the election, will he?

There have been pleas for the Tories to get back to being boring and competent. Personally I don't find competency boring and, after the 'excitement' of the last few months I suspect I'm not the only one. They desperately need a period of quiet, steady competence. What chance?

* https://econ.economicshelp.org/2008/01/lawson-boom-of-late-1980s.html

** some might argue this point but sterling and bond rates are back where they were before Kwarteng's "special fiscal operation" and, while mortgage rates are higher they were goibg up anyway driven by international interest rates, especially in the USA. David Smith agrees with me on this (Economic Outlook column, Sunday Times 30 October 2022)

** https://en.wikipedia.org/wiki/Roy_Jenkins#Chancellor_of_the_Exchequer_(1967%E2%80%931970)

*** Wikipedia's summary of the 1959 election notes that the econony had turned round (good luck with that Rishi) and that Labour weren't trusted because of industrial relations and nuclear disarmament issues. The latter is a bit puzzling as it wasn't a decade since a  Labour government created the British bomb. Still, not much changes, does it? History could yet repeat itself; the train drivers might be Sunak's not so secret weapon

Offshore Paradise?

It's probably jut me, but I had always thought that, when people talked about moving money "offshore" it meant putting money somewhere exotic like the Cayman Islands or Bahamas. OK, or Jersey or the Isle of Man. Well, yes, places like that are used as addresses. And they are just about all British Overseas Territories - why will become apparent below. But the "offshore" actually refers to outside the jurisdiction of the United States. And, if I understand it correctly, the money isn't necessarily held in those places.

London is the world's undisputed global centre for foreign currency trading. I've been reading about how this came about in a piece on the BBC website* which was prompted by the publication of the Paradise Papers a few months ago, when details were published of all sorts of financial transactions which the parties concerned would rather have kept secret. Basically, London achieved this position by accident. Yes, I know London has a geographical time zone advantage, being more easily able to communicate with west and east than they can with each other. Indeed, I read recently that London would be concerned post-Brexit about losing its status not to Frankfurt or Paris but to New York. But only if New York could relocate itself east by 5 hours. But that's not why such a high value of transactions takes place in London.

The story of why and how people with dosh go about avoiding taxes by moving money offshore starts, not surprisingly, around the time of World War I. After all, that is when income tax, which had been around since 1799 (that time the war was against Napoleon) and had been made progressive with the introduction of supertax by Lloyd George in 1909, really took off with higher rates of tax reaching 50%. That lead to wealthy people becoming resident in lower tax Jersey, or putting their money in a trust in the Isle of Man. But it wasn't until the 1950s that London's role became international.

Controls on the movement of money over borders were normal then (Mrs Thatcher scrapped them for the UK three decades later) as speculative money flows were considered to have worsened economic crises. So government approval for, say, Tate and Lyle to invest in a new sugar production facility in Jamaica was required. It was normally a formality but, with a run on the pound under way after Britain, financially weakened almost fatally by World War II, had stumbled into the Suez crisis, the government announced in 1957 that, on a temporary basis, it would no longer approve foreign capital investments.  The City's merchant banks were alarmed. Arranging finance for projects in the former colonies was critical to them. How to avoid ruin?

Hearing the banks' complaints in a series of meetings, the Bank of England agreed in late 1957 to allow the commercial banks to continue to lend and borrow to foreign clients on two conditions:  

1. the lending had to be in a currency other than sterling, and 
2. both sides of the transaction - the lender and the borrower - had to reside somewhere other than the UK.

"The decision was momentous in all respects," says one of the leading experts in offshore finance, Prof Ronen Palan of City, University of London. "They simply deemed certain transactions as not taking place in the UK. Where did the transactions take place for regulatory purposes? Nowhere. "I think it wasn't at all by design; it was a mistake. They didn't understand the implications. It was seen as an accounting device." The so-called "Eurodollar" was born - a global offshore financial market, transacting in dollars and allowing unlimited sums to be borrowed and lent, but under the control of no single state. No act of Parliament (or Congress) sanctioned the decision. There was no thoughtful policy-making, no careful debate.

The Treasury was at first left in the dark. But within years the implications were obvious - this could revive the City of London's fortunes. "By the time the Treasury figured it out, they thought, 'this is good business for the City'," said Prof Palan. Banks from all around the world could borrow and lend in dollars without being subject to US tax or banking regulations - making banking in dollars more profitable out of London than out of Wall Street. Offshore banks didn't have to hold money in reserve for every dollar they lent (as they would in the US), which would dramatically cut their costs.

While transactions were arranged in London, the lenders and borrowers could be registered anywhere. But the parties to Eurodollar transactions needed addresses. So, zero-tax jurisdictions from the Cayman Islands to the Montserrat were used by London's investment banks as the official tax residences of their wealthy customers. Clients could avoid both tax and undesirable scrutiny - for example from the US tax authorities.

Don't knock these places - they don't need to have higher tax rates, else they would just run up huge budget surpluses or have to give citizens not just free prescriptions but free Rolls-Royces. In the British Overseas Territories, local laws were passed to attract more registration business, collecting modest fees that mounted up. No need for a bank branch out there - just a drawer in an offshore lawyer's filing cabinet. Again perfectly sensible. And why would they need sackfuls of regulations when there isn't much activity there to regulate?

Nevertheless there were howls of protest from the US government, which were ignored. Between 1960 and 1970, the size of the Eurodollar market went from $1bn to $46bn and then exploded to to more than half a trillion dollars by 1980, driven by countries rich in "petrodollars" from the hike in oil prices.

After the deregulation of the City of London in the 1986 "Big Bang", US banks joined in, setting up in London. And as the 1990s and 2000s progressed, London became the undisputed global centre for foreign currency trading.

So, if I've got this right (and I might not have 100%) "offshore" companies are only using the Cayman, British Virgin, or other Islands as an address. The money doesn't actually ever go there. I suppose it might often stay in London. And it's why London is the centre of "offshore" for the world. Don't knock it: we take a "cut" in the form of taxes on the companies and people doing the work. But it does sound a bit dodgy, doesn't it?

After all, tax-free, light regulation jurisdictions, including the Bahamas, the Cayman Islands (oh and Delaware in the US) became the corporate locations of choice for legitimate hedge funds. But they were also used to incorporate the vehicles at the heart of the global financial crisis - the 'structured investment vehicles' that did not show up on bank's balance sheets and bought billions of mortgage-backed securities, massively increasing the unnoticed risks in the global financial system which led to the crisis of 2008.

The other thing that we read a lot about is hot money coming into London property. It is estimated that there are more than 36,000 properties owned by anonymous offshore companies in London. The rather useless BBC item in which I found this stat didn't make clear how many of these were domestic rather than company offices, but it did say that included 7.3% of properties in Kensington and Chelsea and nearly 10% in Westminster**.

Indeed, in 2016 nearly 18% of completed new build domestic property completions were to overseas buyers. However, nearly half of these were to people buying with a mortgage, with one analyst suggesting that research suggested that buyers are largely "not ultra-wealthy overseas Russian oligarchs or from Middle Eastern oil money." Three-fifths of all overseas sales in London were made by people or companies from just four countries in south-east Asia: Hong Kong, Singapore, Malaysia and China. "It’s the newly emerging middle classes in Asia getting in on this, who are not any wealthier or poorer than those [British] first-time buyers looking to buy." This is partly because of a rising trend of south-east Asian buyers getting mortgages in their home countries to buy off-plan property in the UK.

So just how big an issue people using a company as a front for buying  into the London property market isn't clear to me. I've also read that suggestions many such properties are left vacant is tosh - they are nearly all rented out. But all of this makes me think I understand a bit more about why many countries think London is a capital of money-laundering. And arguably it's London that is, apparently by accident, the offshore capital of the world.

*Paradise papers: Britain's offshore empire, BBC website 8 Nov 2017 at http://www.bbc.co.uk/news/uk-41906470.
**Just who owns what in central London, http://www.bbc.co.uk/news/business-35757265
***http://www.telegraph.co.uk/property/house-prices/almost-no-evidence-london-homes-owned-foreign-buyers-left-empty/

The "not for" prophet

Would you like your taxes to be collected by a private company acting on behalf of the government under contract? No, me neither. I'd be concerned about tax collectors behaving a bit like aggressive private car clamping companies, while mindlessly pursuing targets set by their public sector bosses.

But would you prefer to have the option of hiring a builder, a removal company or even a hairdresser who works for a not for profit, public sector organisation rather than a private company? The very idea seems a bit bizarre, I know. But I ask because "profit" is a dirty word for many in our society. And it was for me as a socialist-leaning long-haired student in the 1970s, when Stevie Winwood sang "The percentage you're paying is too high a price/When we're living beyond all our means/ and the man in a suit has just bought a new car/with the profit he's made on your dreams"*.

The example of a removal company wasn't randomly selected. The first time we came to move house we decided to do the equivalent of buying IBM, so we couldn't go wrong. But we did, because we chose Pickfords, then the leading national removals company. They were poor. Now this was a while ago - 1980 - but our things were literally packed into tea chests. Many folk won't have seen a tea chest but they're made of rough plywood and, unsurprisingly, are used to ship tea. Indeed the scruffy chests that Pickfords used still had a fair bit of tea in them! This wasn't the only aspect of the service we weren't impressed with. Having made a mental note to take more care in future, get multiple quotes and ask questions etc, we moved house several more times and I thought no more about Pickfords until I was reading Ken Clarke's autobiography last year. What I hadn't realised was that Pickfords, until much later in the 1980s, was still owned by the people, as John McDonnell might put it, being part of the enterprises nationalised by Labour in the 1940s, along with coal, steel, railways etc and was still in the public sector. Clarke happened on this as a government minister and proposed it should be one of the Tories first privatisations. Hmm, I thought. That explains a lot, in particular why they didn't seem to care very much and provided such a poor take it or leave it service at the time.

Now I accept 1980 is a long time ago, but human nature and behaviour patterns don't change much. I take the view that public sector organisations are institutionally less able to provide good customer service. They are often very large, so senior management is remote from the coalface. They are usually highly unionised, so middle managers have little empowerment, indeed they generally have less power, influence and knowledge of what is going on than their team member who is a union rep. That doesn't mean the public sector can't provide good service. But decisions to 'flex' the system to meet specific situations in real time are problematic in such organisations, especially where there is a jobsworth culture. But where the service is fairly standard there's no inherent reason why public ownership should result in a less efficient or responsive service. Apart, of course, from the obvious dynamic that private companies can go bust, so the employees naturally think about what is good for the business. In contrast, state owned enterprises can't go bust and, more importantly for customer service, public sector enterprises tend to be very poor at performance management, being slow to take action when employees under-perform and generally unwilling or even practically unable to sack people who aren't doing their job. There is no fundamental reason why this has to be the case, but it just is.

The public-private mixed economy is ubiquitous throughout the world. Well maybe not in North Korea, but in countries like Russia and China there are quite significant private sectors, albeit in Russia overwhelmingly owned by a small group of oligarchs. If you count black market activity, I'd venture there must be private "business" even in north Korea. The question is all about the mix - what should the state do and what should be left to the market?

I hold the view that the shift towards private provision made by the Thatcher government was a colossal improvement. That doesn't mean everything the privatised companies do is perfect - clearly it isn't. Some private supply arrangements haven't worked at all well, though there are always provisions for the contract to be rescinded if that is the case. And it doesn't mean that more private provision is necessarily for the best, though it would be odd if we just happened to be at the optimal point.

Of course, the real issue isn't whether the operation is publicly or privately owned, it's competition. I recall reading my favourite journalist in the early 90s, Norman Macrae, who used to say "don't throw money at it, throw competition at it" about everything from education to the railways. I suppose you could have competing publicly owned companies, but it wouldn't be for real: everyone would know they couldn't fail in the sense of going bust. It would be sham competition, not red in tooth and claw as they say.

The left accuses the right of pursuing privatisation through dogma. I think it's the other way round. It seems to me that most people on the right want to get it right - make the services work well and cost effectively. But they are prepared to make a case and listen to argument. And few of them think everything should be run by private firms. It's the left who are actually totally dogmatic on this issue, always raising scares about privatisation of the NHS, crying wolf and seeing plots everywhere when there usually aren't any. And remember, the NHS was set up as a public-private partnership - most GPs are self-employed private suppliers providing services to the NHS under a commercial, not employment contract, that pays them to provide the surgery and employ the people who work there, none of whom are generally NHS employees. It's been this way since 1948.

As noted above, one of the reasons why the private sector is generally more efficient is the simple survival motive - lose money on a sustained basis and the company goes out of business. It struck me in the 1970s, organising football club socials, that if you planned to break even you usually lost money. It didn't seem to work out 50-50 and balance out. There are always unexpected costs, often lower revenues, etc. If you set out to make money, you generally didn't lose money. And, when you did well, you created the financial scope to put on a better event next time. Now there is no reason why, given a cost budget to manage to, managers shouldn't succeed in any type of enterprise. It doesn't have to be about making a profit. Except in a public sector organisation there is often an implicit, or even explicit, driver to "spend the budget", for many reasons amongst them that, otherwise, next year's budget will be smaller. Which is lazy management, but tends to happen. Guess what happens if you make sure the budget is spent? There aren't savings, anywhere in the system, to balance the inevitable higher costs that occur in some places. However hard the managers try, overspends for the enterprise as a whole are culturally hard wired into the system.

And there is the feeling in those organisations that it doesn't really matter to overspend; it just shows there weren't enough "resources" (i.e. money) for the task at hand. Commenting on the fascinating underground "Mail Rail" that Royal Mail operated underneath London's streets from 1927 to 2003, Alan Johnson noted that it cost twice as much to build as envisaged and incurred an initial loss of £100,000 a year (a whacking great sum in the 1920s). "Yet the principle objective of the Post Office was not profit but public service"**. So that's alright then? This just confirms for me that it's a good job Johnson, upright member of society and all round good guy that he seems to be, only ever made it to Home Secretary and that, while shadow chancellor for a period, he didn't become chancellor or PM. I expect he'd  be a fascinating and very pleasant chap to talk to, but I also expect I'd conclude that, while his heart was in the right place, he'd have the wrong solutions for every economic issue that we face, every time.

The issue of the public-private mix is sharper than it has been for many years, with Labour's plans to "take back" all sorts of activities into the public sector and Nicola Sturgeon's plans for a public sector energy company in Scotland. In the case of the railways, many reports say that it's a popular policy. Not with those of us who used to commute into London in the 1980s, where I remember the refrain on the platform when trains were late: "Privatise the bastards, it's the only thing that will sort them out". While not claiming that it did "sort them out" I would argue that it is probably not a coincidence that rail passenger journeys have doubled since privatisation, after 50 years of decline before that. The railway has problems but they are, relatively speaking, problems of success now (e.g. far more overcrowding) rather than failure. (OK, apart from cost which remains a big issue).

Many of the problems the railway has are due to the failure to tackle union power. So the unions get away with concealing their insistence on outdated working practices  behind an unprincipled smokescreen on safety. Pay levels are stratospheric compared with broadly equivalent jobs elsewhere, partly because management won't take on the medieval guilds of drivers and signallers. And, even though the train companies are privately run, the culture is still very public sector. It can take a long time to get people in a privatised entity thinking in ways that aren't steeped in public sector culture. (I have an allegorical story, about monkeys and bananas, which my boss often made me repeat for people, as it showed how attitudes can persist through generations of change. But not now, I can't type that much on the tablet). The issue with Train Operating Companies is the unions know the franchise will be re-bid eventually, so they view all management as 'empty suits', temporarily in charge till the next round of changing the cap badges. (Cap badging being the phrase used in BR for the initial separation into units that would become new entities).

As another example, many of Corbyn's young supporters would have extreme difficulty in understanding what it was like being totally dependent on British Telecom for your phone service in  the days before mobiles and broadband. If they really would prefer to go back to 1980s BT and wait many weeks for their phone line to be installed, I'd eat my hat.

Nevertheless, for some, the idea that someone is making a profit out of providing a vital service sticks in their craw. I can understand that, but only a bit. All that matters to me in these situations is the total cost and actual quality of the service. While I don't think utility type services should earn high profit margins (and some of them have been pushing their luck on this), I've never seen why I should care if part of the cost I pay is someone's profit, as long as the total price I pay is as low as it can be. I am much more agitated about an under-performing non- profit making service I rely on paying huge sums to their Chief Executives. This is the case for some local authorities, for example. I'm sorry, I can't accept poor quality and high cost just because the organisation isn't making a profit when I can see a lot of high paid individuals in a management team that I think is taking the mickey. (Polite choice of word there.... but the fact that they aren't making a profit doesn't mean that they aren't, effectively, profiting from us and ripping us off big time through their pay levels.)

And where do the profits of privatised utilities go? Into the pockets of rapacious shareholders? Substantially into pension funds actually.

So, if you think something should be totally owned and operated by the public sector and not privately operated under any circumstances I issue a challenge. Aren't you the one being dogmatic? Where is the evidence that running that particular activity in the public sector will make it better in terms of service delivery to customers and cost? I accept that some might say it would be better for the employees of the business and other stakeholders such as unions, but that surely can't be the primary concern. And, having spent around half of my career in the public sector and half in the private, mainly in former public sector enterprises, I would reject as untrue the idea that employees are happier in public sector enterprises. I have seen too much frustration in public sector teams in organisations I have belonged to and in enterprises that were customers, where the employees know things could be done better and can't get anything done about it. As a result they don't enjoy their jobs as much as they should and many end up indulging in organisational game playing rather than getting on with satisfying their customers.

However, all current evidence shows that pay levels are probably higher in the public sector, though there is an issue about like for like job weight comparison, the public sector reputedly having more higher weight jobs, though I've never seen any evidence for that. What is clear is that when the value of pensions is included, the pay levels in the public sector are much higher. (Please don't try to tell me pensions are in some way separate - they are simply deferred pay and their value should always be counted in comparisons of employment packages).

My experience trying to make former public sector companies competitive and responsive to customers was fascinating, tough and only partly successful, which I'm sure is typical. Relapses in behaviours by the teams could happen at any moment for no apparent reason, years after  change appeared to have been embedded. But I don't think this is an argument for not attempting to privatise enterprises.

It doesn't need a crystal ball or the powers of the oracle to see that taking back water, energy and rail into public hands will increase the power of the unions and decrease competition. It is very unlikely to improve service delivery and will probably increase cost in the long term, even if shareholders aren't there to take out dividends.

That's why I'm the not-for prophet. Because it's a very easy prophecy to make.

*from Traffic's song The Low Spark of High Heeled Boys from the eponymous album, released in 1971. With sound quality what it was in those days I'd always thought he sang "beans" not "dreams", which also kind of works. Either way, not the most risible lyric I sang along to - or still do!
** Alan Johnson's fascinating column on the Mail Rail was in the Sunday Times on 3 Sept 2017