Yesterday Parliament debated the  local government settlement for next year. Most of the discussion was about cuts.  Labour argued that the amount of Exchequer finance for local government was not enough, but declined to suggest how much more should be awarded or where the money might come from.

          No-one seemed interested in debating the numbers. Indeed, few MPs wanted to debate it at all. I pointed out that the government proposes £72,000,000,000 of taxpayer support for local government next year, about the same amount as they gave this year. That is around £1200 for every man, woman and child in the UK. It is around £1400 for every man woman and child in England, as these spending figures were just for England.

                The support for schools was up, as promised. There was a substantial increase in grants for environmental and housing purposes. Not even the Minister wanted to talk about the increases, as everyone was well versed in the real cuts analysis which dominates discussion of these matters.

                 I thought it was a disappointing day for the Commons. Surely the spending of £72,000,000,000 is an important issue? Surely more MPs have something to contribute to how this money should be spent, and  what Councils do with it? Surely more could identify areas of Council spending that we could do wtihout, or we could do more effectively? There were a few genuflections to spending better, but no examples, exhortations or requirements to do so.  I would be interested to hear from readers about whether you think the central government is spending too much or too little on local government, from your observations of local spending patterns.

                          Maybe MPs were nursing their own pay cut. Yersterday was also the day when IPSA announced that next year would see no pay rise, coupled with a 1.85% increase in pension contributions for MPs.  This will take the MP’s contribution rate to 13.75%. I know this will warm some of you, though doubtless you feel it should go up by more.

             There is no exit in the Consolidated Treaties for countries needing to leave the Euro. There is no provision for a country to organise its own departure, and no provision for a vote of the other members to expel a member state. As the existing members in the Euro wish to remain members, that would seem to be an end to the discussion.

            However, the Consolidated  Treaties do require Euro members to conform to the convergence criteria and obligations of membership. These include tough targets for debts and deficits which many states do not meet. Those states that are far away from meeting these requirements are the most vulnerable to politcal and legal pressures from within the Union.

             In practice, when a member state is no longer able to borrow the money it needs to finance itself in the markets, it is forced into a political negotiation with the rest of the Euro area. Such a member state seeks loans from the Euro area and from the IMF. This triggers a thorough review of that member state’s economic policies, and results in both the rest of the Euro area and the IMF imposing conditions on the state in return for loans. It is at this point that the question of continued membership of the Euro should be placed on the agenda.

                The Euro states, the IMF and the troubled state should explore in their private discussions and briefings whether exit from the Euro would assist the recovery programme, and help the remaining states within the zone. If the troubled state was persuaded, the rest of the Euro area should then facilitate its temporary exit from the Euro. If the other member  states were decided that exit would be best, they could make that a condition for their loans, whatever the view of the troubled state.

                           Legally it would be best to implement a decision for a state to leave by transferring that member state to Article 139 status of an EU country with a derogation from joining the Euro. This would make the exit state technically a candidate state for membership, but would also require that state to demonstrate convergence of interest rates, inflation rates and exchange rate with the rest of the zone, and to show it can get its debt down to 60% of GDP and its annual deficit to less than 3%. These requirements would reinforce the discipline of the EU/IMF loans, but would also mean there would be no early re-entry for a troubled state, given the huge divergence of their debt, deficit and interest rates from the requirements.

                   The advantage of doing it all this way is that it should avoid legal challenge. No amendment to the Treaties would be needed. The exit state would move to a status that works for non Euro members of the EU.  The exit would result from the decision of a member state to seek loans and aid, once that state had decided it could no longer finance itself inside the Euro. That is the right time to ask whether it would  be better for that country to leave the currency. It would enable the IMF to put in a normal IMF recovery programme, with troubled state domestic monetary and currency control to assist the process. If at a later date the exit state wished to assert its wish to remain with its own currency in future, consideration could be given to allowing that state a permanent opt out like the UK.

           The more I read about the economic disaster in Greece, the more I wish they would let them out of the currency straight jacket that is part of the problem.

           Greece has five main economic troubles. Its government has borrowed too much in the past, and wishes to carry on borrowing too much. The economy is declining year after year, as austerity bites with no currency depreciation or easier money to offer some relief. The balance of payments remain out of balance and difficult to finance, as Greece is not competitive with the more successful north of the Euro zone. Greece is mired in high unemployment, increasing its deficit and depressing its tax revenues. The banking system is weak. People afraid of the future are taking money out of Greece to put it into safer havens, doing more damage to activity in Greece.

           The official answer to all this is to raise taxes and cut public spending.  The aim is to cut the deficit, hoping  that the debt and deficit can be financed in the normal way. So far this has neither succeeded in cutting the deficit by an encouraging amount, nor has it impressed the bond markets. Greece remains miles off being able to finance itself in the usual way.

            The EU and IMF make heavy weather each time of lending more to Greece. The endless public arguments over how much more austerity Greece has to enforce to justify more borrowing undermines confidence more and leads to further money flight from the blighted country. An IMF programme for an indepenndent state with its own currency usually entails a devaluation  to price the country back into export markets and to cut the value of outstanding debts, and a sensible domestic money policy to allow private sector led expansion. Greece is denied both these features of a normal IMF programme by being in the Euro.

           The EU, IMF and Greece should make private decisions to move rapdily to a Greek exit from the Euro. There will be one off effects on debts, banks and the economy, followed by a real chance of econ0mic recovery. Greece needs growth. It needs more tax revenue to come in from more profit and income to tax. It needs more rich Greeks to keep their money at home or bring it back home. Only a new currency sensibly valued can  bring forward that confidence.

           Tomorrow we will look at how this could be done politcally and legally. It would be a much better option than doubling up the austerity as the economy continues to fall over the cliff. I do not accept that this would cause economic disaster. The price of Greek government bonds has already collapsed, Greek banks are already weak reflecting that and Euro area banks have already written down their positions in Greece. I do not see how Greece returns to decent growth on current policies, and growth is what it needs to give hope amongst the cuts. A devaluation, properly organised, merely acknowledges losses already recorded by investors in Greece, whilst starting the process of adjustment necessary to rebuild the economy.

           In the later months in opposition, when I and other economically minded Conservatives were giving advice to Shadow Ministers, we were often told that our tunes would change a year or two  into government. Wise Shadow Ministers knowingly explained to us that we might accept the  necessity of spending cuts in opposition,  but it would be very different in government. You will, they said, be demanding that we cut less and spare the spending. They expected our brave words to vanish like the melting snow.

             We are fast approaching the two year mark of the government. What is fascinating is that the position is the very opposite of that predicted by some Shadow Ministers. Many backbench Conservatives are uneasy about public spending, but for the opposite reason. There are a variety of areas where the backbenchers want it cut, where Ministers refuse to co-operate.

            Last week-end the unhappiness about taxpayers financing energy subsidies came to the fore. Most Conservatives would like the market to be allowed to operate, to provide more cheaper energy for constituents. Such a policy would spare taxpayers excessive subsidies for windfarms and the like, as well as delivering lower household and business bills. MPs think that is a double win.

             Then  there is the running sore of overseas aid. Many backbench Conservative MPs want the overseas aid budget to be targetted on the really poor and needy. Many of us are happy to be generous to those in great poverty, but do not think the fast expansion of the current budget is doing that. We pressed for China and India to be dropped from the list of aid recipients in 2010, and the money saved. The government  did not agree with us about India. This decision has now come back to bite it, with stories that the Indian government agrees with us backbenchers, and does not want the aid we send.

            Many backbenchers would dearly love to see the end of the HS2 project. Some agree with me that it should be deferred whilst we sort out the public accounts. A £33 billion project looks like an extravagance given the state of the budget, and given the running losses the new trains will make when they eventually run. It is true not a lot of money is going to be spent on its this Parliament, but every £750 million helps. It has also become a kind of symbol of how serious people are about controlling spending. Adding such a large new project before the national accounts are anywhere near stabilised looks rash.

            Then  there is the vexed issue of public sector pensions. The backbenches have been sensible about accepting that MPs pensions, like the rest of the public sector, need to be cut. They have been resolute about the threats to industrial action that have resulted from the government’s plans. The bigger worry for quite a few backbenchers is we are going through the political pain for not enough gain. MPs ask Ministers to stand firm over changes to the  higher pensions in the public sector, and were surprised by the concessions already made.

             There is the ever present question of the EU. Most Conservative backbenchers favourite spending cut would be a big cut in the EU budget and the UK contribution. Ministers have been reluctant to press this too far. Backbenchers are also worried  by the demands to put more money into the IMF. If we are short of money at home, they reason, how come we have all this largesse to give to Euroland and the EU itself? Surely austerity should begin in Brussels, not in my local Council office? As the EU is currently preaching austerity to its members, couldn’t it lead by example and show us how to do it?

                It is hard yet to find examples the other way of backbenchers wanting more spent. Partly that is because we have so far had so few cuts, but partly it tells you the mood of the party. They get it. They understand the need to curb spending after a decade when it let rip. Most of us warned and steadied our electors for the cuts. Most of us want the cuts out of the way now, as our appetite for them may well dull nearer the election.

                      It is true some MPs  are concerned about the withdrawal of children related benefits planned soon. However, the worries do not amount to a full scale demand that the policy be cancelled, merely that the government looks again at some of the anomalies which leave the person on lower pay worse off than a couple on jointly higher pay, which seems unfair. Most MPs accept this is an area for savings, but want a different approach to how they are delivered. They would like to see the couple with one parent staying at home and the other higher rate tax payer not disadvantaged compared to the two earner couple with the bigger total income.

                        Many Conservatives think the defence budget has been cut too much, but there is no move to reinstate extra spending.  All this just goes to show that the party, far from in panic at the scale of the cuts is willing the government on to save the billions that are still being borrowed.

       Yesterday I rang the Leader of Wokingham Borough Council to check they had all they needed from central government and were able to keep the main roads gritted and open. I was happy to learn that they planned a couple of gritting runs on the main roads.

        I got up early this morning to see if all had worked well, and was pleased to find the main local roads were well salted and gritted and running smoothly. Many  thanks to all those who drove the lorries to make sure the rest of us can still get around, and thanks to the Council for organising it.

         The only area of public spending which was cut overall in the first two years of this government was capital projects. The Coalition inherited large forecast cuts in capital from Labour. They abated the cuts a bit, but carried on with the main thrust of them. It has been a bone of contention ever since. The construction industry is not happy. Business lobbies generally have complained about the poor state of our infrastructure. The public sector has made enquiries of Ministers to see if the cuts can be reduced more.

      The government has responded to the pressures. It has not merely found a bit more public money for capital. It has also spoken up about the need to finance more of these items in the private sector. It is working on a scheme to promote more direct pension fund investment in UK infrastructure. It has itself put a lot of political capital into promoting high speed rail, though these plans do not entail any construction work before 2017 for HS2.

        The truth is more privately financed infrastructure would be a good idea. The UK is short of capacity in energy, water, telecommunications, airports and roads. In each of these sectors more private investment is a distinct possibility. It would both act as an economic stimulus as the capital works were undertaken, and help UK competitiveness as better supplies at cheaper prices became available. So what more does the government need to do to bring these improvements about?

Energy:  The government is deeply involved in the sector through its comprehensive regulation, its pursuit of green objectives, its role in the planning process and its overall responsibility for keeping the lights on. It needs to encourage more cheaper energy provision by granting sufficient licences for gas power stations, for oil, gas and shale gas exploration and production, and by reducing subsidies to less economic methods of electricity generation. Progress is being made with securing the construction of new electricity capacity. Changes to licences and the tax regime could foster a more active exploration and development phase for hydrocarbon.

Water  The government and the Environment Agency regulate the water industry and take overall responsibility for ensuring water comes out of the taps. They could set new targets for availability and reserves, and foster the construction of additional reservoir capacity, additional stand by desalination plant if needed, better pipe networks so less is lost in transmission, and explore whether more can be done to transport water between water basins.

Telecommunications. The government is embarked on supporting the main telecoms companeies to ensure good broadband coverage for most people, with faster line speeds and better capacity.

Airports   The government’s veto on new capacity at Heathrow is proving unpopular with business lobbies and growth promoters. Various schemes are being examined for additional runway capacity. An early and relatively quick way of expanding capacity would be to divert Northolt to civil use, whilst considering which longer term option to adopt.

Roads I will not repeat my ever popular private roads full scheme! The government could allow some private toll roads to add new capacity.

      Yesterday I called in at the consultation on the construction of new homes in Shinfield.

        I raised several issues with the representatives of the developers. These included

        whether they would build homes in a style which harmonised with the existing village, as their display boards showed very different designs with no local reference or roots

         whether they would offer compensation to local residents close to the development and to the construction disruption

         whether they would consider buying by agreement any homes badly affected, and including them in the scheme.

                I am willing to pursue these or other issues for residents if they would like my help.

      The Euro crisis has been postponed. The Euro area has now adopted the very popular approach in the modern west of simply printing more cash to see them over a rough patch. The European Central Bank’s decision to lend more than half a trillion euros to Euro area banks, for 3 years at 1%, was the nearest thing to a free gift to the banks they thought they could get away with.

          In the short term it has worked. Very weak banks now look stronger, because they can now get their immediate cash needs direct from the ECB. They are not so beholden to the markets, who were getting prickly about which banks to lend to, how much to lend, and what price to charge. Some banks are using extra cash borrowed cheaply from the ECB to buy into the sovereign bonds of Italy and Spain. They can then pocket the difference between the 4-7% yield they pick up on the bond, and the 1% they pay for the money. It’s a great idea all the time they do not lose on the capital value of the bond. As banks buy more of these bonds, so it gets a bit cheaper for the governments to borrow, easing the pressures on them. It’s an indirect way of doing what the US and UK did directly – simply buying up their own debt to make it cheap.

          In the UK the main effect of quantitative easing has been to keep government borrowing rates very low, allowing the government to go on spending way more than it raises in taxes. The government via the Bank of England now owns more than one quarter of all the government debt in issue. It has bought up enough to keep government borrowing rates on the floor, and to allow nervous foreign holders of the debt to sell out and move away. The authorities had hoped it would result in easier credit throughout the economy, but that was never likely. The commercial banks are still constrained by the regulators, so the cheap liquidity circulates mainly within the government sector. The private sector faces credit shortage and relatively dear loans. The UK looks likely to do more of this. There are various stories in the press saying that the Bank will do some more once it has completed its second programme of £75 billion. This means that for most of this year we can expect low government borrowing rates, and continued high levels of government borrowing.

        In the US the authorities have so far avoided another round of quantitative easing. Instead they are currently trying to lower longer term rates by selling shorter term debt and buying longer term debt within the large total of QE already established. The US is doing more to cut its deficit than the UK judging by recent figures. According to spin doctors on both sides of the Atlantic the opposite is the case. One respected institution in the UK has now confirmed that we have had very few cuts inUK government  spending so far – total current spending of course is well up on two years ago – whilst the latest figures in the USA do show declines.

      Does all this money printing matter? Why didn’t people do it before, if the authorites have found a painless way of paying for all that excess public spending? In the past advanced and disciplined countries have avoided money printing on a large scale, believing it to be inflationary. If an economy is operating at capacity and you print and circulate a lot of extra money, the main effect should be an increase in the price level. You have too much money chasing too few goods.

        The authorities today in Euroland and the UK believe there is spare capacity. They therefore hope that printing more money will mainly go into calling more of the unused resources into use, creating a free lunch effect from printing more cash. Unfortunately, if the new cash is all spent within the public sector, and entails facilitating the build up of yet more public debt, it just defers the crisis until the state has to repay that debt, or until the markets panic at the size of the extra debt.

       In Euroland it is clearest. The markets have already taken fright at the size of the public debts in Greece and Portugal. They were beginning to take fright at the scale of the Italian and Spanish public debts. Printing money has not solved the Greek and Portuguese problem, but it has temporarily eased the market’s view of the Italian and Spanish problems. The authorities would be wrong to think this is a permanent fix. If Italy and Spain use the time  well that the extra money has purchased, to cut their deficits and make their debts more manageable, it will work. If they carry on as before, thinking they can build up even higher levels of debt, at some point the markets will do to them what they are doing to Portugal.

       In the US and UK the authorities have other options.  Printing lots of money can lower  the value of the currency, helping competitiveness and cutting living standards by stealth. There is no need or likelihood of US or UK default, because the authorities can simply print the money to repay the old debts if all else fails. If they get to that point it will then prove inflationary. In the meantime the UK has bought itself some time. Inflation is falling for the time being despite the QE. It would however, be unwise to think that a country can adopt a new permanent model of paying for public spending by printing the cash. If you do it for too long there will be a day of reckoning.

            This morning I spoke to the Maiden Erlegh Sixth Form as part of their General Studies. I was assured that Labour and Lib Dem representatives have been invited in to speak at later dates to provide balance.

            I spoke to them about the changing landscape of work, where more jobs will have to come from self employment and small companies, as the total number of  new jobs available in the public sector and UK based large companies declines. I talked of the huge opportunities the internet and other new technology offers, where a student in his bedsit in Harvard University can set up a business which makes him a multi billionaire in his twenties. I reminded them as an example that the pharmaceutical industry, traditionally a big employer of UK scientists, is now wanting the early research work to be carried out by small sub contracting companies.

            There were two main sets of questions. The first were criticisms of Dr Cable’s tuition fee and loan scheme, and the second were questions hostile to Middle Eastern wars.

             I explained the government approach to universities. The aim of the government  scheme is ensure anyone can afford to go to a university, and n o-one has to repay any of the money borrowed unless they have a job with a reasonable salary. It is still a good idea for students keen to use the university experience for their betterment to go, borrowing the money on these sensible terms to do so. The repayment terms have been made easier for people on lower incomes.

            I agreed with the general thrust of the criticisms of too much western military intervention in the Middle East, and explained that I have been arguing for early exit from Afghanistan and no military action in Iran.

Let us assume Mr Montgomerie did his research well. I have no doubt that the issues raised by Number 10 are serious ones which Conservatives need to address. He mentioned two in particular which do matter a lot. He reported that there are worries the health changes could upset more electors. He quoted a Lib Dem source as saying that Conservative Ministers are not engaged in tackling one of the great evils of our time, unemployment.

I disagree with his statement that there are no people within the Conservative party expressing an alternative which could make a difference for the country, and in due course for Conservative electoral prospects. He is right that there is no figure on the right acting as a challenger or alternative to David Cameron. That is a deliberate choice by some figures on the so called right. They do not wish to be factional, to create an impression of personality based splits. They do not wish to divert the government from its crucial national task of economic recovery and public budget improvement.It is an irony that this is taken by some on the inside as a welcome weakness, rather than as a wise and helpful assistance to a government facing a very difficult set of challenges.

There are a wide range of attractive policies proposed by a range of Conservative backbenchers that could make an appreciable difference to the future of the coutnry, and could boost Conservative poll ratings. Many Conservative MPs do not share the pessimisim about prospects. After all, they argue, the polls were boosted rapidly by using the veto on the EU last December, and were boosted again by the benefits cap policy in January.

There are many ideas bubbling out of the talented 2010 intake on new Conservative MPs, as well as ideas coming from more experienced Parliamentarians. Most Conservatives would like to break the state banks up and get them powering a stronger recovery. Tough action to make the banks work better polls well. Many Conservatives would like a revolution in the energy department, so the UK could offer cheap energy to fuel industrial recovery as well as helping hard pressed household budgets. Polling suggest cheaper energy would be very popular, would relieve the squeeze on incomes  and could be delivered by  market solutions with private sector  investment money.

Many Conservatives want power back from Brussels, as promised in the last Conservative manifesto. Making moves to start to do that would be popular, as the country is now far more Eurosceptic than its Parliament. Tax cuts are always popular. Conservative Ministers should not let Lib Dems pose as the tax cutters, demanding a higher income tax threshold, when Conservatives are yearning for a tax break of any kind and would happily settle for higher thresholds.

Many Conservatives want a Freedom Bill, to reduce bureaucracy to liberate  enterprise to get on with creating more jobs. They want better control of our borders, so more of the jobs go to people already settled here, and want sensible welfare reforms to make it more worthwhile to work. Far from being uncaring about unemployment and people’s prospects for higher incomes, most Conservative MPs I know would list that as one of the most central tasks they wish to promote. In many cases they would say it is the overriding task. When asked about the government,  they are proudest so far of the welfare reforms being carried through.

Conservative MPs wish Andrew Lansley well with the health reforms. They were unhappy about the way the Lib Dems forced a pause and then changes in them.  Mr Clegg had after all  signed up to the whole package and  signed a ringing   recommendation of them in the original White Paper. Conservatives have no difficulty with giving more power to Doctors to make choices for their patients. They are becoming more nervous about the bureaucratic changes being forced on the government by Lib Dem and special interest pleading. It would be wrong to think the health reforms were some incubus designed by the Conservative right. Most Conservative MPs are entirely pragamatic about the reforms, wish them well, and do not wish them to do any damage (nor do they do any damage by design). All Conservative MPs I know are wedded  to the funadamental popular principle of the NHS, free at the point of need. The government did not embark on these reforms to placate the “right”.

All Conservative MPs recognise that the next budget is a crucial event for Conservative and government fortunes. This is the last budget that allows three years to see the beneficial consequences of any of its proposals, and still allows a decent length of time to undertake reform and get it to settle down before the General Election. The budget needs to set the course for faster growth – and therefore for a lower budget deficit – for the rest of the Parliament. The best way to get the deficit down is to promote faster growth and generate many more jobs. If the government does this, the Conservatives could be rewarded with a majority next time. There is no substitute for fixing the roof now it’s raining. I will return to more detailed Budget measures in the days ahead.