Family politics

This post was originally posted on www.stephenbeer.com/blog .

The New Year has begun with Conservative plans for health unravelling and, on the same day, David Cameron appearing to dilute their policy on marriage tax allowances.

The whole area of family policy is fraught with difficulties. We all have experience of family in one way or another and each family is unique. That said, surely there must be an alternative to either rewarding traditional family models or adopting a laissez faire approach to family policy, with the state sorting out the consequences? Dare I say it, is there even a ‘third way’ for the politics of the family?

That’s the approach I took when co-writing the lead article for the Common Good, the Christian Socialist Movement’s magazine. Each issue focuses on a theme, with a variety of articles on a subject giving different opinions and perspectives. The lead article introduces the theme with both opinion and some key facts and explanations. The new issue is looking at the family.

What matters is stable families. It’s not the government’s job to dictate how people should organise their lives – relationships can be hard enough work at times as it is. Indeed if the most stable families do indeed tend to have married parents (which does not mean being married leads to a more stable family necessarily), we should be focusing resources on those who most need support. That means lone parents and families with children in poverty. It’s also those people for whom things haven’t worked out as they hoped. It’s possible for Labour to do this while being positive and supportive of marriage too – most people celebrate weddings for example whatever their own take on relationships or particular circumstances at the time. After all, if two people are prepared to make a public commitment that they will be together for the rest of their lives in marriage or partnership why should we avoid talking about it?

Labour needs to shift its language on this a bit. Then we can concentrate on what matters most in terms of government policy and that is promoting family stability within communities and providing support to poorer families, with a focus on ensuring that we get nearer to providing equal opportunities to all children and young people.

It was clear this week that Cameron’s plan for a marriage tax allowance is has not been thought through. It’s designed to give the impression the Conservatives support marriage. One thing of course that does help family stability, including marriages, is an economic policy focused on the whole nation with an emphasis on fighting unemployment. Yet the Conservative’s economic policy is in a worse state than their family policy.

Darling's decisions: the verdict

Progressive politics must rise to the challenge presented by the debt situation and find new solutions with a clear narrative. We need to focus on boosting productivity and changing incentives to continue the fight for equality. If we can do this, Labour will remain the Party for the future.

So concludes my analysis of the Chancellor's Pre Budget Report in Tribune this week. You can read it at www.stephenbeer.com .

An interesting election result in Hastings

While the Tories held their St Helen's council seat in Hastings in the by-election yesterday, Labour's share of the vote rose considerably. In 2008 Labour received 24% vs 59% for the Conservatives (on a 50% turnout). Yesterday, on a turnout of 37%, the Tories won with 41% of the vote but Labour's share increased to 37%.

The LibDem vote fell from 17% to 14%. This time around there were two other parties standing - the BNP (6%) and English Democrats (2%).

We shouldn't draw too many conclusions from a single result (apart from credit to the Labour campaigners) but it appears that in hard-fought Hastings the Tory vote is vulnerable and the LibDem vote appears to have been squeezed.

The outcome of the UK tax on bonuses

The new UK tax on bank bonuses announced by Chancellor of the Exchequer Alistair Darling on Wednesday finally introduces some clarity into the debate about bank bonuses. There had been much speculation about what form such a tax might take. Now we know. Might there be some unintended consequences?

The new tax is not a supertax on the income of individuals receiving bonuses, but rather on the bonus pool in any given bank. The aim is to act as a discouragement to banks to prevent them redistributing some of their profits into excessive bonuses when those profits have been made possible by government intervention, both direct and indirect. Some banks may choose to increase the bonus pool to compensate but this would probably not go down well with shareholders. The tax is only effective for one year.

Some people have argued that this measure will push banks to operate overseas, or because they will not pay large bonuses that they will lose personnel. However, the tax is temporary and any such impact might be mitigated by similar measures elsewhere - for example France is to impose a just such a tax. Alistair Darling has not had the last word on bonuses.

Yet it is surprising that the UK banking sector hasn't just hunkered down for a while, sorted itself out, involved its stakeholders in setting new ethical codes, and consulted with shareholders about what banking should look like in future. It is this apparent lack of gratitude towards the taxpayer, and lack of appreciation of what bank actions have done to the wider economy and peoples lives, that stokes anger against banks in this country and around the world. That's not healthy for anyone.

Economics & politics of the Pre Budget Report

The political message of the Chancellor’s Pre Budget Report this week is that despite the deep recession caused by the banking crisis, Labour will protect frontline spending in the NHS, schools, and the police service. Spending elsewhere will have to be lower as savings are found. This will not be easy. However, Labour is not prepared to reverse the gains we’ve made as a country on improving healthcare, education, and in cutting crime. Bank’s will be discouraged from paying out large bonuses this year since bank profits have depended upon taxpayer support both direct and indirect. Funds will be directed to combat youth unemployment.

Another key message is that the government will not risk the recovery by cutting back on spending too soon. When debt as a percentage of national income is too large, you can tackle it by both paying down the debt and by increasing growth. That’s why the Chancellor’s commitment to the new high speed rail lines is so important. Investment in infrastructure helps make the economy more productive and that boosts growth in future.

As far as the big picture is concerned, Alistair Darling’s statement changed little. While the economy is now forecast to shrink further than expected this year, the estimates of the deficit this year have risen from £175bn to £178bn – less than had been expected. Another key macro point is the Treasury’s assumptions about the loss of output. In the budget it estimated that the UK’s productive potential was less than previously assumed and that the structural budget deficit (that part that won’t shrink automatically into recovery) would be 9.8% of GDP this year. The Pre Budget Report suggests this wouldn’t be quite as bad, at 9.0%. It means that there is slightly less for the Chancellor to do to bring debt down.

This must have been the most difficult Pre Budget Report to write. Last year the world was reeling from the banking crisis and the government had taken decisive action to support the financial system. This year, while the financial system is not yet in full health, we have had a year of deep recession. Though growth is forecast to bounce back as businesses build their inventories back up again, recovery will take time. Most people know that. The role of the Pre Budget Report was to show that action is being taken to tackle the deficit while not risking recovery. Alistair Darling succeeded in that aim.

Recent opinion polls are not conclusive but they remind us that there is still much to fight for in the election. Labour must focus its manifesto not just on what we have done to help the economy and financial system. We must focus clearly on what we stand for and what we will do in government in the next four years.

Bank bonuses and linking banks with the rest of society

Should there be a windfall tax on bank bonuses? That's what's being reported as we approach the Pre Budget Report this coming Wednesday. There may be a good case but what matters more is how we improve banks relationship with the rest of society.

Investment bankers are expecting to receive large bonuses after a very profitable year. Those profits have come about because (on behalf of taxpayers) governments:

• took large stakes in banks to inject capital;
• guaranteed bank lending;
• lent money at reasonable terms to banks;
• insured almost all of banks toxic assets (the main cause of the problems);
• and with interests at historic lows in effect printed money and pumped it into the financial system.

If a frontline investment banker is not making money in this environment they may be in the wrong job.

So it's no surprise that the case for a windfall tax has gathered support (for example see Martin Wolf in the Financial Times). There is a certain justice about it, since the bonuses could not have been considered had taxpayers (including many now out of work as a result of banks' actions) not bailed out the banks.

It might be difficult to enforce because a competitive environment does exist. So a system-wide problem can be hard to solve without some level of international cooperation. And bonuses are not in principle wrong - many people in different industries earn bonuses. It depends on whether they are properly linked to performance (without being helped by taxpayers) and whether they are particularly out of proportion. There is scope for some government action to ensure taxpayer support is not being creamed off into individual pay packets.

But banks should be encouraged to be more rooted in our society. The time is surely right for some sort of Community Reinvestment Act - something which has been in force in the US for years. Banks should be required to invest in local communities. The Cooperative Party is promoting the idea. It won't prevent another crisis but it might help refocus banks and promote a long term sustainable banking model.

Pay bankers with toxic assets

The controversy over Royal Bank of Scotland bonuses has highlighted that those bonuses only exist because the UK taxpayer owns most of the bank, is standing behind RBS so that it won't fail again, and has required the Bank of England to print money to make life easier. The taxpayer is also insuring £240bn of RBS's toxic assets via the Asset Protection Scheme, which sees the taxpayer's interest in RBS rise from 75% to 84%. The taxpayer is insuring the value of the securities which got RBS into a mess in the first place.

Here's a suggestion I heard - rather than pay bonuses based on current profits, which come from taxpayer support, why not pay bankers in the original toxic assets?

That way, some risks can be transferred from the people of Britain to a pool of people who ought to know all about risk. The toxic assets would have to be held for the long term - perhaps until they mature. The bankers could stand to make a great deal, which would be a reward for the risks. Or they may make little at all. But it would link bonuses with the risks the bank(s) took and the long term health of the financial system - not just that part of it supported today by taxpayers.

Royal Bank of Scotland bonuses and why the Treasury has to examine itself

How bizarre are reports that the board of Royal Bank of Scotland has told the government that members might resign en masse if the main owner - the taxpayer - insists it controls the level of its bonuses. They have stirred up once again the still fierce public anger against the banks, showing that they really just don't 'get it'. But should the Treasury examine itself over this matter?

When RBS got into trouble a year ago and the taxpayer stepped in and bought a majority stake (around 70%), the board members were changed. In those days of stress and panic, the Treasury took the view that it really didn't like holding stakes in banks: it would act as if it was just another institutional shareholder. This was formalised with the establishment of the UK Financial Investments to manage the peoples bank shareholdings. For some reason, the Treasury believed it should keep UKFI at arms length.

While some institutional shareholders regularly oppose excessive executive pay for example, most do not do so often enough. But when you own 70% of a company, you really cannot be an arms length shareholder. You have to be involved.

The problem with behaving in the way you think an institutional shareholder would behave is that you will end up acting in a pre-crisis manner. The news is the world has changed.

The RBS board apparently believes that it is not in the interest of shareholders (mostly the taxpayer) for the government to interfere in bonus arrangements. Yet such bonuses can only happen because the government supports the bank and because the taxpayer has injected billions of pounds into RBS. Indeed, the board risks its objectives (its interpretation of fiduciary duty) by its state of denial, since that may encourage calls for harsh regulation or nationalisation.

Both sides seem to be backing down to some extent. But this incident does illustrate that the banks need institutional reform because they are incapable of reforming themselves. Their worldview was destroyed by the financial crisis, yet they carry on with 'business as usual'. RBS today should not be like the RBS of two years ago. That is why government action is so important.

Banks must rediscover values for their own survival

The banking sector has managed to put itself in the worst position possible in advance of any further financial crisis. By pushing on with 'business as usual' it has done little to assuage the anger still being expressed by people at its irresponsible behaviour and, now, at news of billions more being paid in bonuses (for performance that depends on the taxpayer backing the system). That means that banks cannot afford to make any further mistakes; the backlash would probably be disproportionate because people will feel that banks just do not 'get it'.

Bank behaviour is perplexing and it certainly seems to be frustrating some ministers in government. Financial Services Secretary Lord Myners gave an interesting speech last week to a City seminar of the Council of Christians and Jews. Noting the need for leadership on values in politics, he argued that 'Just as we need such values leading to action in our politics, we need them in our banks and economic life too. Banks must acknowledge that the values and ethics which drive their businesses are built on the values and ethics of wider society.'

Lord Myners listed examples of what this should mean in practice, including 'challenging...egregious remuneration practices.' Referring to excessive pay he expressed himself '...disappointed at the extent to which we are meeting opposition to change from those who have been rewarded so generously in the past.'

Myners highlighted three principles outlined by the Archbishop of Canterbury to guide thinking in the economic and environmental crises. They were: need for truth and honesty; recognise our stewardship of the earth and our responsibility to future generations; and understand our interconnectedness in that all of us are in these problems together. Myners called on people of faith in the City to 'Let your core values pervade your every action. As faith communities you have so much to offer to the debate.'

We can see that the debate about values in banking is developing. It is not enough to talk about values or urge their adoption. People need to take the lead and demonstrate how such values work out in practice, especially when there is a cost involved. And it is clear we cannot rely on people and institutions to reform themselves. At the least, we need to establish incentives in the financial sector to encourage the virtuous behaviour we seek. Structural reform (eg separating riskier banking from retail banking) is required too. All this is consistent with arguing that when they work properly, banks are a good thing for our economy. That's why we need to save them - even from themselves.

Government can also take a lead. Shareholders should behave responsibly and make their voices heard on executive pay. Taxpayers have large stakes in some banks via the government's shareholdings - those managing such stakes on our behalf must be required to take a lead. If this seems impossible to enforce - well who is apparently exercising unaccountable power in our country?