Wednesday, 28 October 2009

Good bank, bad bank? Peoples bank!

The European Union (EU) is expected today to approve plans for the Northern Rock bank to be split in two – so-called “good” and “bad” banks. The Rock has been state-owned since the spring of 2008.

This was an early part of New Labour’s attempts to prevent a complete meltdown after customers queued to withdraw their deposits in 2007 when the default rate on sub-prime mortgages in the United States triggered the global credit collapse.

The idea is that the “good” or profitable business will be sold back to the private sector, whilst the “bad” part containing the “toxic” non-performing loans, including the 125% mortgages pressed onto people desperate for housing at any cost, will be retained in the public sector, to be serviced from taxation.

Once EU approval is in place, the principle is likely to be extended to the Royal Bank of Scotland and Lloyds. Supporters of the plan – and there are many from all the main parties – are keen to see wider competition. They want to open the field up to new entrants such as Tesco, Virgin and a range of foreign banks like National Australia Bank – already owner of the Clydesdale and Yorkshire.

The scheme has its roots in the 1930s’ rescue in the United States of a cascade of failing banks. Today’s proponents point to its success in Sweden after the country went through a property market collapse in 1991 which threatened the financial system.

But they choose to ignore the scale of today’s crisis which has engulfed the world’s much more highly-interconnected financial system so critical to the worldwide production and trading activities that underpin the globalised corporations.

The intertwined crises of collapsing consumer demand, shrinking global trade, declining manufacturing and inactive credit markets spell the end of the post-war era of a spiralling growth of commodity production fuelled by cheap labour and mountains of debt.

Plans to restore the financial system to profitability are necessary but not sufficient to restore the capitalist economy to the growth it so badly depends upon for survival.

Throughout its three and a half centuries, the capitalist system has alternated between periods of competitive growth fuelled by the credit that relied on the impossible dreams of ever-increasing profit and the crashes that followed when the interest payments ceased. As the dust clears it reveals the massive overcapacity that must be eliminated before a renewed period of growth can begin. That is the stage of the crisis that we are in now.

The looming impact of the changing climate provides the measure of the damage inflicted on the planet by half a century of profit-motivated credit-fuelled growth. The system of production for profit must be stopped, terminated, replaced. Its replacement can be democratically-determined sustainable production by communities working co-operatively to satisfy their needs and provide opportunities to fulfil individual and collective potential.

This new era will need a system of accounting for exchange and a means of measuring and redistributing the value generated in production to fund development. It won’t need a vast edifice of speculation. Stock and foreign exchange markets can be closed, gambling in the derivatives casino ended.

With democratic control over the finance system, decisions can be made about which debts can be cancelled and which renegotiated. The “good” and “bad” capitalist banks choice is no choice at all. In their place we want genuine people’s banks that protect savings and extend social investment.

It’ll need a social revolution to make these changes, but what’s the alternative?

Gerry Gold
Economics editor
reposted from A World to Win

Sunday, 25 October 2009

Tories fail the tax test

Prem Sikka

What is the Conservatives’ big idea on job creation? Make public sector workers redundant and reduce people’s welfare rights through cuts. However, they have captured press headlines. Shadow Chancellor George Osborne told the Conservative Party conference that, if elected, the Tories would offer tax breaks to new businesses for the first two years of their life by waiving National Insurance contributions on the first 10 people employed in any new business and create 60,000 new jobs. Conservative leader David Cameron has described the policy as the “biggest, boldest programme to get people working”. Predictably, the Confederation of British Industry agrees.

Does the policy make any sense? The Conservatives have not explained what exactly a “new business” is. Without details, tax policies cannot achieve their assumed goals.

We have all heard of fly-by-night operators who close one shady business and start another. The Conservative Party’s announcement must be music to their ears. They can all close one business and start another the next day to claim exemptions from employer National Insurance contributions regardless of their profits. Perfectly respectable businesses can also indulge in the same creativity by hiving off marketing, public relations and other activities to new subsidiaries – all to claim exemptions from national insurance contributions. Hairdressers, greengrocers, estate agents and corner shops can all do the same, too – without creating a single new job. The only people making any money will be accountants showing them how to lay the old business to rest and start the new one.

Every time any government or political party announces any special tax concessions to one section of business, they set off the avoidance industry in motion. In trade, these are called loopholes and are exploited by accountants and lawyers. The Tory proposal will do the same. They seem to have learnt nothing from past mistakes. Small businesses cannot create jobs on the back of a National Insurance holiday. Businesses need sustainable revenues and no one is going to take on an employee if trade is depressed. The idea that the Conservative plans will result in the creation of some 60,000 jobs is pie-in-the sky and simply unachievable. The Conservative Party has failed the first test of tax policy – that is, to design a policy that cannot easily be abused. They are planning to create another loophole.

Governments should stimulate the economy through more efficient and sustainable means. They can reduce business rates for small businesses. They can extend 100 per cent first year capital allowances, depreciation allowed for tax purposes, to all qualifying investment in plant and machinery. Currently, 100 per cent relief is available on capital expenditure on all plant and machinery (apart from cars) up to £50,000 a year only. The cost of extending the 100 per cent allowances for 2009-2010 would be around £5 billion. Her Majesty’s Revenue and Customs already has a well-established way of policing it. So there will be no new bureaucracy. The proposal would help to retool businesses and create jobs. It can result in orders for the dwindling manufacturing sector and build capacity.

The public sector is targeted by both Labour and Conservatives, but the private sector has singularly failed to create new jobs. Sacking people neither creates jobs nor provides the spending stimulus which our high streets need. Most of the additional jobs since 1997, nearly one million, have been created in the public sector and 75 per cent of these are held by women, mainly outside London. So any cull in the public sector will hurt women disproportionately and also blight the regions. Hardly any questions have been asked about the failure of the private sector to create jobs, even though it depends on the public sector for contracts in healthcare, education and many other areas

A key requirement for sustainable jobs is that people have spending power and that can only be achieved through progressive taxation that redistributes wealth. Ordinary people spend the largest part of their money on food, clothes, shoes and travel in British shops. This has a greater multiplier effect than billions thrown at rich bankers and others. Their speculation on the stock market and housing creates bubbles. At best, they might create some extra business activity for estate agents, accountants and lawyers, but the multiplier effect of their wealth is minimal.

Instead of public expenditure cuts that penalise teachers, nurses, cooks, care workers and security staff who have not caused the economic crisis or gained very much from the boom years, the Government should look at reforming the tax system. In 2007/8, pension contributions relief added up to £37.6 billion. 60 per cent of it went to those on higher rates of income tax and £10 billion went to just 1 per cent of the taxpayers earning more than £150,000 a year. By confining pension contributions tax relief to the basic rate of income tax, the government can release up to £22 billion a year.

Removing the artificial upper ceiling on National Insurance contributions can raise £5 billion. Currently, no National Insurance is paid on incomes above £844 a week.

Even the Conservatives know that speculators cause harm. Yet neither they nor Labour have enacted a Tobin tax on currency transactions. A modest Tobin tax at 0.005 per cent could yield up to $33 billion (more than £20.60 billion). To prevent leakage, this could be co-ordinated within the European Union and raise nearly $17 billion (in excess of £10.6 billion) or more, if higher rates are levied.

Derivatives, the complex financial bets on the movement of interest rates, commodity prices and exchange rates turned out to be the weapons of mass destruction. The global GDP is around $55 trillion, but the face value of derivatives at December 2007 was $1,148 trillion. A simple 1 per cent tax on these could raise more than $11 trillion and a significant proportion of that would accrue to Britain, Tobacco, alcohol and gambling are taxed because they are considered to be harmful. The same principle should apply to financial instruments, as there is now plenty of evidence that this form of reckless gambling has caused havoc.

These are just some of the ways in which revenue could be raised to reflate the economy and especially help the less well-off. A 10 per cent increase in income tax personal allowances would cost about £4.5 billion. A 10 per cent increase in the state pension may be another £10 billion. Money would be available to waive university fees, prescription and dental charges.

Resources could also be used to build a greener economy and a more balanced and diversified economy that favours manufacturing, science, technology and lifelong learning. But instead we now have the obsession with cuts and gimmicks such creating jobs through National Insurance contribution holidays.

*Prem Sikka is professor of accounting at Essex University. This article first appeared in Tribune

Saturday, 24 October 2009

UK in deepest recession on record

GDP figures issued by the Office for National Statistics (ONS) yesterday showed that the UK economy is still in recession, after shrinking 0.4% in the three months to September 2009.

This means the UK economy has been contracting for 18 months, since March 2008 - the longest period of recession on record. The UK economy has now contracted 5.9% since the beginning of the recession.

John McDonnell MP, LEAP Chair, said:

"The recession continues to bite. In the real world people are losing jobs and experiencing increasing levels of poverty and hardship.

"The Government can no longer sit on the sidelines as spectators. It needs to take a more interventionist stance: nationalising the banks, and investing in manufacturing."

Andrew Fisher, LEAP Co-ordinator, said:

"Talk of recovery has been premature. The bailouts have worked to restore stock market confidence and bankers' bonuses, but the real economy is still suffering: unemployment is rising, homes are being repossessed, and wages are being suppressed. For most people, recession is going to be with them for a long time to come."

Wednesday, 21 October 2009

Who pays for the crisis? When Labour was Labour

Flashback to sixteen years ago: Labour was under the leadership of John Smith, and one Gordon Brown was one year into being shadow Chancellor of the Exchequer. The UK was in recession and Labour knew who should pay for it: the rich, and big corporations

Labour was also witty and radical enough to attract Stephen Fry and Hugh Laurie to appear in the party election broadcasts.

Certainly beats Brown gurning on Youtube and Darling telling the public sector it'll be cut and privatised with pay frozen

Sunday, 18 October 2009

One person's inflation is another's deflation

There has always been a debate about the true level of inflation. Like the ruling ideas of each age, the ruling definition of inflation has always been that which best suits those in power: whether employers around a negotiating table or the Government setting benefit rises in Whitehall.

Inflation is calculated by assessing changes in the price of a ‘basket of consumer goods’ weighted proportionately to average spending patterns. The two most common measures, the Consumer Price Index (CPI) and the Retail Price Index (RPI) use slightly different ‘baskets’ to tell us the rate of inflation.

Inflation affects working class people in a variety of ways, as it directly or indirectly informs decisions on pay, benefits, pensions, student loan interest, council tax, etc.

However, 'inflation' is not a neutral term in a society where there are wide disparities in income and therefore spending patterns. The reality is that inflation affects people very differently in the UK, due to the high – and growing – levels of inequality.

The Office for National Statistics’ (ONS) Family Spending survey shows that the poorest 10% of households spend an average of £187.40 per week, compared with £1720.10 per week in the richest 10%. Therefore the richest spend in a week what it takes the poorest over two months to spend.

In this context, is a single inflation rate relevant? Different income groups will inevitably spend their incomes on different items, and individual items within the ‘basket of goods’ will contribute differently to the rate of inflation. LEAP was commissioned by the Trade Union Co-ordinating Group (TUCG) to specifically look at how inflation affects different income groups.

A good example of the disparity of spending patterns is on housing. The typical decile 1 (poorest) household spends 9.66% of total expenditure on rent payments, which for decile 10 (richest) drops to 0.86%. However, mortgage costs are respectively 3.47% and 9.34% - as, typically, the poorest rent and the richest buy their properties.

Other 'basic' living costs: bills (council tax, water, electricity, gas, communications), food and drink, clothing, and transport – were also calculated. These items form an underlying expenditure that is uniform across households since the goods are indispensible or mandatory – items that it is hard, if not impossible, for people to ‘do without’ or cut back on, even in times of recession.

Expenditure on the 'essentials' accounts for over two-thirds of the spend of the poorest households, but less than one-third of the wealthiest.

In reporting our findings, we have defined a new inflation measure called ‘Essential Inflation’ based on the changes in these essential goods that households.

With the exception of clothing and food and drink, these ‘essentials’ are all areas where the Government either sets or regulates costs. There is therefore a responsibility for Government to ensure that inflation does not disproportionately affect the poorest households.

In the year to February 2009, the ONS calculated the CPI measure of inflation to be 3.2%, and the RPI measure 0.0%. In the year to February 2009, ‘Essential Inflation’ was -0.82%. However, if we look at the ‘Essential Inflation’ rate broken down by decile, it was 1.92% for the poorest households and -3.21% for the richest.

In terms of ‘Essential Inflation’, the past year has seen a rise in the cost of living for the poorest households, yet a fall in the cost of living for the richest households. The data clearly shows that inflation is a class issue. In current pay negotiations, where pay freezes are being proposed across organisations, we should understand that a pay freeze is a real terms cut of nearly 2% in living standards for the poor, but a real terms increase for the richest.

The full LEAP Inflation Report: Why Inflation is a class issue is available as a free download. For a hard copy, please send a cheque for £2.50 payable to ‘Another World is Possible’ to LEAP, PO Box 2378, London, E5 9QU.

(a version of this article will appear in the November issue of Labour Briefing)

Wednesday, 14 October 2009

The social economics of marketised health

Rosamund Stock

Now that so many things (including hospital trusts and especially foundation trusts) are to be run as businesses, all assets are there to be "sweated". So we have hospitals which are constantly run at capacity in order to increase so-called efficiency.

But the costs, not necessarily monetary, the costs of doing so are transferred to the patients. So we have patients going into hospitals without knowing which ward they will be on. At the most vulnerable point in their lives when many are terribly worried (in fact many are terrified) by what lies ahead, they are cast adrift in a huge building where they know virtually no one, all the social relationships which they could have established from admission the day before, the temporary identity they would have constructed have been ripped away from them. They are forced to wait at one of the most important times of their lives in a characterless waiting room with no chance to explain or discuss their worries, or explain to those who will look after them about their other conditions.

People are social animals, they need to belong, they can only be "people" as part of a network of social relationships. In social psychological terms, these patients have been hooded and bound.

This is the cost of "efficiency" in the public sector.

Tuesday, 6 October 2009

The Tories - but where's the opposition?

Over the last few days David Cameron and George Osborne have finally elucidated the nightmare vision of what a Tory Government will look like: attacks on welfare, public sector pay freezes, raising of the state retirement age. The Morning Star spells it out in stark detail on its front page 'Tories aim to hit the poor hardest'

. . . and yet. Where have we heard all this before? The Tories say they will move 500,000 off incapacity benefit, but New Labour's stated aim is to move 1 million off incapacity benefit. They both say they will privatise welfare delivery and introduce workfare schemes - which is why the Tories supported New Labour's Welfare Reform Bill through the Commons earlier this year.

Darling and Osborne made almost identical statements on public sector pay freezes, and the Tories, who supported New Labour's Pensions Act to raise the state retirement age to 66, now say it should happen in 2016 rather than 2026.

It all reminds me of what Tony Benn - a dissident prisoner in the Callaghan (IMF cuts) Cabinet - wrote in his diary on 24th June 1977, "we have provided a blueprint . . . and we will have no argument against it". New Labour has provided a blueprint for the Tories and can have no argument against it. Tony Benn continued, "it is an outrage". Indeed.

It's also economically incompetent:

1) On its own terms, raising the state retirement age in 2016 won't save a single penny for another seven years, so it does not make sense as Osborne presented it as a solution to the deficit. It's also incredibly regressive, DoH figures suggest that someone in Social Class V has a life expectancy of 72; while social class I averages 79. This means the poorest will get 6 years of pension, the richest 13 years. Any raising of the state retirement age is regressive.

2) Cuts in pay and benefits will mean less being spent in the economy and undermine attempts to reflate. In a recession you need to put money in the hands of those who will spend - not take it away.

3) The deficit is not a problem (immediately) - the UK has less deficit then many other countries (as % of GDP) and should be investing in jobs and industry to give the economy a shot in the arm - and if cuts need to be made (or funds diverted from elsewhere) then Trident, ID cards, and the war in Afghanistan would be almost universally popular choices. This is basic Keynesianism, but instead we seem to have a austere monetarist consensus now for cuts towards a balanced budget.

There is now a massive gulf opening up on the left - and yet New Labour continues to move to the right . . .

Since Osborne and Darling want to talk up 'crisis' - while painting themselves as the saviours - then perhaps we need really drastic solutions: the appropriation of the 200 largest companies and their profits used to pay off the national debt?

For an alternative to cuts, see the LRC / LEAP briefing 'Cutting our way to defeat?'