The fragile Cameron-Clegg Coalition is drawing in more forces with mad but bad schemes to help with the assault on public sector services. And they are using little known, fast-track parliamentary procedures to get their way.
Today, the Cabinet Office launches its early intervention review. It’s a genius idea led by an equally stunning partnership of labour and capital - Graham Allen, Labour MP for North Nottingham and the chief economist of Goldman Sachs, Jim O’Neill.
Like many of the Coalition’s liberal-influenced ideas, the objectives are undeniably attractive. Experiments have shown that it is possible to prevent people falling into drink and drug abuse, vandalism, criminality and joblessness with targeted programmes of education and other forms of early social intervention.
Right-thinking Labourite Allen has been promoting the idea for years, and it fits in beautifully with the Coalition’s approach. The trouble is, cuts in government spending needed to reduce the deficit means there’s no money to pay for it. But don’t despair! Goldman Sachs is at hand, with proposals to draw in private sector investment. It’s really worth trying to get your head round it.
Early intervention saves money that would otherwise have to be spent on keeping repeat offenders and poorer people in prison. So if you can get richer folk to buy specialised investment bonds from the government, and use that money for early intervention schemes, you can pay the investors dividends in the future from the money you didn’t have to spend later on.
No really, they’re serious. Never mind that it was Goldman Sachs that talked the Greek government into the rather similar debt-based schemes that got it into so much trouble, bringing it to the brink of state bankruptcy. Goldman Sachs is after all a very successful, highly profitable company. Able to pay vast bonuses to its senior staff. An example to us all.
At the same time, Cabinet Office minister Francis Maude, a real Tory, and former managing director of investment bank Morgan Stanley, is advancing his campaign against public sector unions. He aims to reduce the cost of outsourcing swaths of government business from cleaning and catering to information technology, health and waste management.
Maude’s plan is to scrap the protection of conditions for workers whose jobs are transferred from the public to the private sector. It will be discussed in the Public Services Forum, a cosy consultation group involving unions and employers who take on outsourcing contracts.
Maude’s latest proposal follows in the wake of his emergency legislation to slash the redundancy terms of 500,000 civil servants. “Thousands of civil servants are sitting around doing nothing because it is too expensive to make them redundant,” he says.
“It is not a good way to treat people, to leave them in limbo with no actual job,” Maude believes. So he’s going to get rid of the current scheme, which can pay up to six and a half years salary, and cap it at 12 months’ salary for compulsory redundancies, but a “generous” 15 months for voluntary ones.
Just to speed things up, Maude has labelled the emergency legislation a “money bill” which limits the Lords’ ability to amend it, and allows the government to put it into effect as soon as it becomes law – which could be in October – without the usual two month delay.
A muted response from union leaders will only encourage the Coalition to press on with its attacks. Rank-and-file members facing the onslaught deserve and need better leadership.
Gerry Gold
Economics editor, A World to Win, www.aworldtowin.net
28 July 2010
Wednesday, 28 July 2010
Monday, 26 July 2010
Capitalism in the wake of the financial crisis
Stephanie Blankenburg
In June 1931, J.M. Keynes warned a Chicago audience that
“today [we are] in the middle of the greatest catastrophe – the greatest catastrophe due almost to entirely economic causes – of the modern world. I am told that the view is held in Moscow that this is the last, the culminating crisis of capitalism, and that our existing order of society will not survive it”
and around the same time, the then Governor of the Bank of England, Montagu Norman, warned his French counterpart that
“[u]nless drastic measures are taken to save it, the capitalist system throughout the civilized world will be wrecked within a year. […] I should like this prediction to be filed for the future”
In hindsight, we know that such fears underestimated capitalism’s resilience. However, the premonitions of impending catastrophe – in the form of the rise of European Fascism and World War II - were, if anything, understated.
Perhaps the most startling contrast between 1931 and 2010 is the total absence of any sense of systemic crisis of capitalism today compared to assessments, such as the above, in the wake of the Great Depression. Quite the contrary: Despite continuing fears of a “double-dip” recession in the UK, in some Euro economies and now also in the US, the ideological momentum is, for now, very starkly with the advocates of free-market global capitalism under the leadership of financial capital. What is under attack are not the perpetrators of the current crisis but the public sectors of advanced capitalist economies – that is, the livelihoods, pensions, healthcare, education, public transport, theatres and cultural centres, and more generally the social and collective infrastructure, of those who rescued their failing banking and financial sectors from collapse only a two years ago. Officially, today’s crisis is not one of capitalism, but of public deficits.
Immediate outlook and policy alternatives
It is obvious that current policy initiatives, at the international as well as national level are either woefully inadequate or blatantly counterproductive. The starkest manifestation of the latter is, of course, the austerity hysteria that has gripped the UK and EMU economies, in particular Germany.
In the US, the Dobb-Frank bill potentially paves the way for a reform of the US financial sector that tackles the core problem, namely the separation of risk bearers from risk evaluators. Its main weakness is, however, that central features of the bill still have to be put into draft regulatory reform legislation that is more than likely to be watered down through lobbying by financial institutions and moderate senators. At their most optimistic, most commentators concede that this bill is unlikely to affect the US financial industry as it stands and may only affect potential future consolidation.
At the international level, the Basle III negotiations are still ongoing, but all signs are that a future agreement will fall far short of requirements for a fundamental re-organisation of the modern financial architecture and its structural inability to evaluate risk. The latest IMF paper on “Lessons from the crisis for central banks” (PIN dated 20 July 2010) concedes that Central Bank policy frameworks have to go beyond inflation targeting in the future, but its emphasis on a continuing primary concern with price stability, and its focus on a wide-ranging but limited-in-scope range of “macroprudential” tools signals the total failure to even begin to take account of the current structural imbalances of the world economy. The only initiative at the international level that goes beyond a patchy focus on half-hearted financial reform, is the call for the creation of a “Global Economic Coordination Council” of the Final Report of the UN Commission on the International and Monetary and Financial System, published in September 2009 and largely ignored since (http://www.un.org/ga/president/63/commission/financial_commission.shtml, see in particular pp. 87,90 f).
The immediate implication is that, in the de facto absence of any international policy project to tackle the structural flaws and imbalances of the international economy, financial capital remains at liberty to destroy core state and public capacities in advanced economies. Perhaps the most important policy insight to be drawn from the current situation is that what is under way, certainly in Europe (including the UK), is a concerted programme to roll back the state much beyond the tenets of conventional neoliberal programmes of the 1980s (and 90s): Initiatives, such as the upcoming Spending Review in the UK, or the adoption, in Germany, of a law that enshrines the requirement to balance the state budget year-by-year in the Federal Constitution (from 2016), are set not only to limit state intervention into the economy, but to destroy existing public infrastructure and the very capacity of states to intervene in the future, independently of which governments may be in power.
This programme evolves against the background of increasing economic instability and a sharpening of international economic imbalances, including:
- Major “double-dip” recession in the UK and in the US (where it is now clear that the fiscal stimulus programme of 2009 has failed to revive domestic investment (manufacturing) and consumer demand).
- In Germany, austerity hysteria in the form of the “balanced budget law” will lead either to a long-term deflationary spiral in Germany or else to an expansion of its trade surplus/dominance of the Eurozone. In both cases, the eventual collapse of the Euro becomes a much more likely prospect that is currently still the case. Whatever the inherent flaws for the EMU – and those have been obvious for some time – a collapse of the EMU primarily means the eradication of 60 years of economic and political integration in Europe, and a likely return to nationalistic fragmentation. The only winner here is, once again, financial capital faced with a large number of infighting small states, rather than at least the potential of a unified large state.
- A more difficult accumulation process in China, and a reinforcement of tendencies in the Asia Pacific region “to go its own way”, rather than this potential “powerhouse” of world economic growth being productively integrated in the global economy
- Continued downward pressures on growth in other LDCs, and concomitant increases in political instability
- Increasing political instability in particular in Southern Europe.
This may not compare to the disaster that followed 1931, but should be more than sufficient to concentrate minds. From a Left perspective, a number of closely related angles on the creation and systematic promotion of policy alternatives should be on the agenda:
- In Europe (including the UK), the core immediate policy task will, of course, be to oppose deficit and austerity hysteria. Importantly, for such opposition to be effective, it cannot simply be based on cries of “injustice”, however justified these may be. Rather, it requires a clear analysis of why state deficits can and should be financed and to what precise purpose. This means breaking the rightwing hold on hegemony over the deficit debate pro-actively and aggressively, not through defensive skirmishes about what not to cut, but through an all-round defence of the state as a forum for the political negotiation of collective interests. Perhaps ironically, the economic argument for an extended role of the state in crisis-ridden capitalist economies is easily put. There is contention about detail, but clear overall theoretical as well as empirical support for more rather than less state. What matters will be putting these (all to often still academic) arguments into clear political language, and to focus on re-conquering the very idea of the state as a collective political arena.
- National opposition to austerity programmes must, from the start, be linked to wider argument about contemporary capitalism at the international level: Neoliberalism has, for now, successfully neutralised national policy debate about the state (and deficits) by taking international capital mobility as a given: Any reform proposal that defends public spending at the national level but ignores the fact that such initiatives will only be successful in the presence of an international reform to govern (financial) capital mobility and to co-ordinate expansionary fiscal/monetary policy moves, will fail. Left counter-initiatives need not immediately have complete politically and economically feasible recipes of how to curb international capital mobility. For a start, it will suffice simply to attack neoliberalism on its weak flank: Its lack of an international equivalent to Adam Smith’s national “system of liberty” on which its advocacy of free markets is still based.
- In the medium run, a core concept to focus on for the development of policy alternatives will have to be that of economic democracy in core capitalist economies: Neoliberalism has not only successfully suppressed national economic policy over the role of the state. It also has managed to sell its anti-state stance as the epitome of political democracy (see, e.g. Camerons’s “Big Society” of volunteers). What neoliberalism, or any legitimising capitalist scheme before it, has never managed, is to defend or legitimise the total absence of economic democracy from capitalist societies, other than through the (now stalled) rise of mass consumption. But markets function like undemocratic voting systems: The individual vote is weighed by the amount of money the market participant can spend/ has access to. Your money is your voice. Focusing on the lacunae that is economic democracy in capitalist societies would to-date mean not only to revive trade unionism, but also to introduce the concept of active participation to debates about what the mass demand that drives capitalism should look like, i.e. the formulation of new forms and structures of demand and the type of markets we want to create and expand, on the basis of progressive income distribution: Demand for an expansion of social infrastructure, environmental protection, extended community services, participatory institutions, demand also for redistribution towards other, developing, economies. If the first point above is clearly enough argued, it will be obvious that the problem is not one of the availability of resources (finance), but of democratic decision-making about their use, and about the risks entailed in putting these resources to differing uses.
* This is an edited version of the paper Dr Blankenburg delivered at the July LEAP meeting.
Sunday, 25 July 2010
Poverty in retirement - the Coalition blueprint for pensions
Andrew Fisher
The Coalition government has, in just two months, attacked pensions on an unprecedented scale. This attack has also been comprehensive – attacking the state pension, public sector pensions and private sector occupational pensions.
This has been implemented in the context of a ‘pensions timebomb’ – because people are living too long or because public sector pensions are too generous. This is false, the real ‘pensions timebomb’ is the potential for a huge increase in the levels of pensioner poverty.
Before looking at the specifics and impacts of the new government’s policies, it is worth considering the current state of pensioner poverty in the UK.
Pensioner poverty today
In 1998 the government calculated that 2.9 million pensioners lived in poverty. By 2005-06, pensioner poverty had declined to 1.9 million – thanks to a combination of the means-tested Minimum Income Guarantee (which later became Pension Credit) and the Winter Fuel Allowance.
However, as inflation increased and the economy collapsed this progress was less consistent. In 2006-07 pensioner poverty increased to 2.1 million – with London pensioners affected most severely (23% of the capital’s pensioner population). In 2007-08 it fell back to 2 million. In 2008-09 it fell further, to 1.8 million.
Pensioner poverty still however compares unfavourably with the rest of the EU. A European Commission report in July 2009 showed that only in Cyprus, Latvia and Estonia was there higher pensioner poverty than in the UK. On the EU measure, 30% of UK pensioners live in poverty – the EU average is 19%.
The Basic State Pension
The current basic state pension is £97.65 per week (£5077.80 per year). In 1981 the state pension was worth 23.7% of average earnings. That year the Thatcher government broke the earnings link, and the value of the state pension has declined to just over 14% today.
The Coalition Government has been praised for immediately re-establishing the link between pensions and earnings – something that New Labour resisted for 13 years, and had only pledged to do in 2012, “subject to affordability and the fiscal position”.
For most of New Labour’s years in government, the rise in earnings exceeded RPI inflation. Restoring the link with earnings would have meant a real terms increase in the basic state pension. In 2010, earnings are expected to be well-below inflation, and probably in 2011 too. The government’s pay freezes in the public sector will help this to be the case.
The new government has though committed to a ‘triple-lock’- the higher of earnings, CPI and 2.5%. Unfortunately for pensioners, in the next couple of years at least RPI is expected to be higher than all three of the ‘triple-lock’. The Budget redbook reveals that the move from RPI to CPI on pensions and benefits will save the Exchequer £13 billion over five years (no disaggregated figure for pensions only is yet available).
Raising the state pension age to 66 by 2016 will also have a devastating and very unequal impact. An average 65 year old man in Kensington and Chelsea can expect to live a further 23 years, while in Glasgow it is only 14 years.
By the age of 64, the majority of men are not working. Raising the pension age to 66 will neither make more jobs available nor them more attractive to employers. For some it will mean them claiming Jobseekers Allowance or Employment and Support Allowance – both cheaper than the basic state pension.
Public sector pensions
There is no greater mythology than that surrounding public sector pensions. A Guardian editorial on 5 July stated:
The infamous and ubiquitous “gold-plated” public sector pension is of course largely a myth. The average local government pension resides at just under £4,000 per year. Excluding the upper echelons of the senior civil service, the average civil service pension is only slightly higher at £4,200 per year (a positively tin-plated £80 per week). For teachers the average is a more healthy – yet far from gold-plated – £9,000 per year . Overall, the TUC suggests the average public sector pension is £5,500 per year.
Nevertheless, these sums are overly generous and the government has commissioned former New Labour Minister John Hutton to review public sector pensions. All indications suggest that higher employee contributions (for lower pension values) will be recommended – further hitting the real incomes of pay frozen public sector workers.
Public sector pensions have already been attacked though by the indexation changes announced in the Budget. According to TUC research , an eighty year old pensioner with an average public sector pension would be more than £650 a year worse off – equating to £12.50 per week.
The net cost of paying public sector pensions in 2009/10 was a little under £4 billion. The cost of providing tax relief to the one per cent of those earning more than £150,000 is more than twice as much. The cost of providing tax relief to all higher rate taxpayers is more than five times as much.
Private sector occupational pensions
Shortly after the Budget, on 8 July, Pensions Minister Steve Webb MP announced that the government would legislate to alter the standard for calculating defined benefit schemes from RPI to CPI.
This is a significant saving for corporate Britain – already benefiting from the £24.7 billion of corporate tax breaks over five years announced in the Budget . The exact saving has been calculated by Pension Capital Strategies as £100 billion over the lifetime of existing schemes.
Meanwhile, the private sector continues to close or dilute final salary pension schemes. BBC management is proposing to change current pension scheme rules, to allow no more than a 1% annual increase in the amount of salary that can be considered toward a pension, irrespective of any pay rise or promotion staff might get.
This could cost staff tens or even hundreds of thousands of pounds in retirement. For example, a man aged 25 who joined the BBC five years ago, currently earns £25,000 and gets a 4.7 per cent pay rise every year, could have looked forward to a pension worth £31,266 a year on retirement at age 60. Under the new proposals, his pension collapses to about £9,200 a year. Over a retirement of twenty years, this is a loss of over £400,000.
It’s not bad news for all private sector pensions though. According to the TUC's 2009 PensionsWatch survey, the average accrued pension for FTSE 100 Directors was £247,785 a year – an increase of 28% since 2007.
And of course top earners in the private sector benefit most from pensions tax relief. 60% of the gross tax relief – more than £22 billion a year – goes to higher rate taxpayers. A quarter of tax relief – nearly £10 billion a year – currently goes to the one per cent of the population who earn more than £150,000.
Conclusion
The Coalition government is clearly using the national deficit and its own honeymoon period as an opportunity to introduce measures that have little to do with tackling the deficit and more to do with protecting the privilege of its class base.
The comprehensive and simultaneous attack on pension rights should enable public and private sector workers and trade unions, as well as existing pensioners to unite in common campaigns to tackle this attack on the most basic security for working people – dignity in retirement.
The Coalition government has, in just two months, attacked pensions on an unprecedented scale. This attack has also been comprehensive – attacking the state pension, public sector pensions and private sector occupational pensions.
This has been implemented in the context of a ‘pensions timebomb’ – because people are living too long or because public sector pensions are too generous. This is false, the real ‘pensions timebomb’ is the potential for a huge increase in the levels of pensioner poverty.
Before looking at the specifics and impacts of the new government’s policies, it is worth considering the current state of pensioner poverty in the UK.
Pensioner poverty today
In 1998 the government calculated that 2.9 million pensioners lived in poverty. By 2005-06, pensioner poverty had declined to 1.9 million – thanks to a combination of the means-tested Minimum Income Guarantee (which later became Pension Credit) and the Winter Fuel Allowance.
However, as inflation increased and the economy collapsed this progress was less consistent. In 2006-07 pensioner poverty increased to 2.1 million – with London pensioners affected most severely (23% of the capital’s pensioner population). In 2007-08 it fell back to 2 million. In 2008-09 it fell further, to 1.8 million.
Pensioner poverty still however compares unfavourably with the rest of the EU. A European Commission report in July 2009 showed that only in Cyprus, Latvia and Estonia was there higher pensioner poverty than in the UK. On the EU measure, 30% of UK pensioners live in poverty – the EU average is 19%.
The Basic State Pension
The current basic state pension is £97.65 per week (£5077.80 per year). In 1981 the state pension was worth 23.7% of average earnings. That year the Thatcher government broke the earnings link, and the value of the state pension has declined to just over 14% today.
The Coalition Government has been praised for immediately re-establishing the link between pensions and earnings – something that New Labour resisted for 13 years, and had only pledged to do in 2012, “subject to affordability and the fiscal position”.
For most of New Labour’s years in government, the rise in earnings exceeded RPI inflation. Restoring the link with earnings would have meant a real terms increase in the basic state pension. In 2010, earnings are expected to be well-below inflation, and probably in 2011 too. The government’s pay freezes in the public sector will help this to be the case.
The new government has though committed to a ‘triple-lock’- the higher of earnings, CPI and 2.5%. Unfortunately for pensioners, in the next couple of years at least RPI is expected to be higher than all three of the ‘triple-lock’. The Budget redbook reveals that the move from RPI to CPI on pensions and benefits will save the Exchequer £13 billion over five years (no disaggregated figure for pensions only is yet available).
Raising the state pension age to 66 by 2016 will also have a devastating and very unequal impact. An average 65 year old man in Kensington and Chelsea can expect to live a further 23 years, while in Glasgow it is only 14 years.
By the age of 64, the majority of men are not working. Raising the pension age to 66 will neither make more jobs available nor them more attractive to employers. For some it will mean them claiming Jobseekers Allowance or Employment and Support Allowance – both cheaper than the basic state pension.
Public sector pensions
There is no greater mythology than that surrounding public sector pensions. A Guardian editorial on 5 July stated:
“if only union leaders would show the steely pragmatism that so often eludes them, and borrow a line from the Conservative manifesto – we're all in this together”
“If the state's workforce can convince the country that it is after copper- and not gold-plated pensions, then it might just start to win hearts and minds”
The infamous and ubiquitous “gold-plated” public sector pension is of course largely a myth. The average local government pension resides at just under £4,000 per year. Excluding the upper echelons of the senior civil service, the average civil service pension is only slightly higher at £4,200 per year (a positively tin-plated £80 per week). For teachers the average is a more healthy – yet far from gold-plated – £9,000 per year . Overall, the TUC suggests the average public sector pension is £5,500 per year.
Nevertheless, these sums are overly generous and the government has commissioned former New Labour Minister John Hutton to review public sector pensions. All indications suggest that higher employee contributions (for lower pension values) will be recommended – further hitting the real incomes of pay frozen public sector workers.
Public sector pensions have already been attacked though by the indexation changes announced in the Budget. According to TUC research , an eighty year old pensioner with an average public sector pension would be more than £650 a year worse off – equating to £12.50 per week.
The net cost of paying public sector pensions in 2009/10 was a little under £4 billion. The cost of providing tax relief to the one per cent of those earning more than £150,000 is more than twice as much. The cost of providing tax relief to all higher rate taxpayers is more than five times as much.
Private sector occupational pensions
Shortly after the Budget, on 8 July, Pensions Minister Steve Webb MP announced that the government would legislate to alter the standard for calculating defined benefit schemes from RPI to CPI.
This is a significant saving for corporate Britain – already benefiting from the £24.7 billion of corporate tax breaks over five years announced in the Budget . The exact saving has been calculated by Pension Capital Strategies as £100 billion over the lifetime of existing schemes.
Meanwhile, the private sector continues to close or dilute final salary pension schemes. BBC management is proposing to change current pension scheme rules, to allow no more than a 1% annual increase in the amount of salary that can be considered toward a pension, irrespective of any pay rise or promotion staff might get.
This could cost staff tens or even hundreds of thousands of pounds in retirement. For example, a man aged 25 who joined the BBC five years ago, currently earns £25,000 and gets a 4.7 per cent pay rise every year, could have looked forward to a pension worth £31,266 a year on retirement at age 60. Under the new proposals, his pension collapses to about £9,200 a year. Over a retirement of twenty years, this is a loss of over £400,000.
It’s not bad news for all private sector pensions though. According to the TUC's 2009 PensionsWatch survey, the average accrued pension for FTSE 100 Directors was £247,785 a year – an increase of 28% since 2007.
And of course top earners in the private sector benefit most from pensions tax relief. 60% of the gross tax relief – more than £22 billion a year – goes to higher rate taxpayers. A quarter of tax relief – nearly £10 billion a year – currently goes to the one per cent of the population who earn more than £150,000.
Conclusion
The Coalition government is clearly using the national deficit and its own honeymoon period as an opportunity to introduce measures that have little to do with tackling the deficit and more to do with protecting the privilege of its class base.
The comprehensive and simultaneous attack on pension rights should enable public and private sector workers and trade unions, as well as existing pensioners to unite in common campaigns to tackle this attack on the most basic security for working people – dignity in retirement.
Thursday, 22 July 2010
The Solution
Wouldn't it be easier for the people to dissolve the markets and elect another?
Gordon Nardell
Brecht's acerbic irony came to mind after reading the umpteenth piece of right-wing post-Budget punditry justifying severe, long-term cuts in public spending and debt because otherwise – to paraphrase – governments will forfeit the confidence of the markets.
This nonsense turns democracy on its head. Decision-making by elected governments is in thrall to those same markets whose judgments have been palpably wrong for the last 20+ years: consistently marking up the value of equities, Sterling and USD on the myth of stable, unstoppable growth while the debt crisis quietly accumulated, followed by the abrupt volte-face of demanding deficit reductions that threaten to choke off such feeble recovery as some economies have managed since 2008. The analysis ought to be that the markets have forfeited the confidence of governments – and more importantly of the people who elect them. So: why can't the people dissolve the markets and – well, not necessary elect another, but replace them with democratic mechanisms for providing liquidity?
The economy, and the question of public sector deficits in particular, has been a near-taboo subject during most of the Labour leadership election so far. But when Andy Burnham broke cover recently, it was to say Labour shouldn’t be "in denial" about the need for deficit reductions. The logic of private markets infects all. The real point of this paper is this. The cuts agenda, now revealed as the price of solving a crisis in private markets, makes it no longer possible to avoid a simple choice of political position. We are either for an economic system based on the dominance of markets, or against it. And if we’re against it, then what we now need to provide is a carefully constructed, popular set of arguments in favour of something else.
Gordon Nardell
After the uprising of the 17th June
The Secretary of the Writers Union
Had leaflets distributed in the Stalinallee
Stating that the people
Had forfeited the confidence of the government
And could win it back only
By redoubled efforts. Would it not be easier
In that case for the government
To dissolve the people
And elect another?
Bertold Brecht, The Solution, 1953
Brecht's acerbic irony came to mind after reading the umpteenth piece of right-wing post-Budget punditry justifying severe, long-term cuts in public spending and debt because otherwise – to paraphrase – governments will forfeit the confidence of the markets.
This nonsense turns democracy on its head. Decision-making by elected governments is in thrall to those same markets whose judgments have been palpably wrong for the last 20+ years: consistently marking up the value of equities, Sterling and USD on the myth of stable, unstoppable growth while the debt crisis quietly accumulated, followed by the abrupt volte-face of demanding deficit reductions that threaten to choke off such feeble recovery as some economies have managed since 2008. The analysis ought to be that the markets have forfeited the confidence of governments – and more importantly of the people who elect them. So: why can't the people dissolve the markets and – well, not necessary elect another, but replace them with democratic mechanisms for providing liquidity?
The economy, and the question of public sector deficits in particular, has been a near-taboo subject during most of the Labour leadership election so far. But when Andy Burnham broke cover recently, it was to say Labour shouldn’t be "in denial" about the need for deficit reductions. The logic of private markets infects all. The real point of this paper is this. The cuts agenda, now revealed as the price of solving a crisis in private markets, makes it no longer possible to avoid a simple choice of political position. We are either for an economic system based on the dominance of markets, or against it. And if we’re against it, then what we now need to provide is a carefully constructed, popular set of arguments in favour of something else.
Wednesday, 21 July 2010
The Case for a Revenue-Neutral Carbon Tax (aka 'Fee-and-Dividend' System)
Jerry Jones
After 20 years of international policy debate and protocols, and some 30 years since the scientific evidence that human generated carbon dioxide from the consumption of fossil fuels was causing global warming was first being assembled, almost no progress has been made towards doing something about it. It has been ‘business-as-usual’, with the rate of increase of carbon dioxide going into the atmosphere, if anything, accelerating. It is becoming increasingly obvious that the policies that have been advanced so far are not working. We clearly need to be doing something different. And it is urgent. The evidence is that average temperatures increasing a few degrees more will start to release the methane from methane hydrates currently locked in ocean floors and in permafrost. Methane is a much more potent greenhouse gas than carbon dioxide, and its release will turn what still is a manageable problem into perhaps a terminal catastrophe for humanity and life on earth, as we know it.
The task is to drastically reduce the amounts of carbon dioxide going into the atmosphere, and to stimulate research into the development of new technologies to produce energy without adding to the carbon dioxide already there – and to foster lifestyles and the development of equipment, appliances and transport that make more efficient use of energy. The key step towards achieving those goals must be to make the price of energy that adds to the carbon dioxide in the atmosphere prohibitively expensive. The point is fossil fuels are only cheap compared with other sources of energy because their true costs to society – their externalities in economists’ jargon – are not taken into account.
There are two major approaches towards raising the price of energy produced by fossil fuels: either the imposition of a carbon tax (charged on the basis of the amount of carbon dioxide the technology puts into the atmosphere); or so-called ‘cap-and-trade’ (that is imposing a global cap on the quantity of carbon dioxide that can be released into the atmosphere and then allocating or auctioning tradable permits to producers of energy and fuels allowing them to release carbon dioxide up to a certain amount into the atmosphere).
Economists concerned with climate change are more or less unanimous that the carbon tax approach is by far the more efficient. Yet it is the ‘cap-and-trade’ approach that policy-makers more or less unanimously have adopted. The supposed advantage of ‘cap-and-trade’ is that it sets the amount of carbon dioxide that is permitted to be released into the atmosphere and allows market prices to adjust for achieving that target. With a carbon tax, the price of carbon is fixed, but it leaves the amount of carbon dioxide released into the atmosphere uncertain, which supposedly is its disadvantage. In fact, we do not know how much carbon dioxide in the atmosphere is safe, so the target in ‘cap-and-trade’ would have to be set somewhat arbitrarily anyway (which could prove costly if set too high or too low). With a carbon tax, the rate of tax can be adjusted as new evidence came in and as new technologies were developed.
A major advantage of the carbon tax is that producers and consumers would know what the costs or savings of their actions were (for example, investing in new methods of power generation, giving up the car, heating the home less, installing insulation, and so on). When doing a cost benefit analysis, as it were, they would not be faced with the uncertainty of not knowing what the carbon price will be next month, next year, or whatever, due to the volatility characteristic of carbon prices in the ‘cap-and-trade’ system (as has been observed in practice with the embryonic forms of ‘cap-and-trade’ already in existence), which would likely be made worse by speculators.
If a carbon tax is so much better than ‘cap-and-trade’, why is it the latter that governments the world over is pushing? Even economists, after stating that the carbon tax is more cost effective, come out in favour of ‘cap-and-trade’. The simple answer is that it is because most governments and most economists are in thrall to the bankers and big financial institutions. As Cameron Hepburn, puts it (after previously stating that ‘a carbon tax appears more efficient than tradable allowances’):
Or to put it more straightforwardly, switching to a carbon tax, even though it is better, would be unpopular with big business. Meanwhile, for us consumers of energy, ‘cap-and-trade’ is more costly than a carbon tax because we have to pay for the expenses and commissions of the traders involved, including those in futures markets and other derivatives that go with such trades – which is precisely why ‘cap-and-trade’ is so popular with the big financial institutions.
A carbon tax saves on all of that. All that is required is a simple system for collecting the tax at the point of power generation or manufacture of fuels. This would require minimal administrative costs, especially as these activities are highly concentrated among a small number of large firms. In short, from the point of view of society as a whole, a carbon tax has to be the more rational approach towards controlling carbon emissions.
Of course, the extent to which the carbon tax would be passed on to consumers in the form of higher prices of the goods and services would not make it popular – except to note that the prices would be even higher in the ‘cap-and-trade’ system for the reasons just given. Then there would be the question of what the government would do with all that extra revenue? Would it be used efficiently and wisely? Would it be invested in the research and development of alternative sources of energy? In short, can we trust governments to act properly in the interest of everybody? On the evidence to date, as Hansen notes, the answer has to be a resounding no.
That is why Hansen proposes, which is what I am now proposing here, that all of the revenue from a carbon tax (less very small administrative costs) be re-distributed on a per capita basis to every citizen, with children being allocated half the amount of adults (reflecting the extent to which parents act on behalf of their children). This is the dividend element of the ‘fee-and-dividend’ approach, which is what Hansen calls the carbon tax. By distributing the revenue to citizens, it would be they who made the decisions. Those with a small ‘carbon footprint’ would benefit, while those with ‘gas-guzzling SUVs’ and air conditioners would have to pay dearly for their habit. In short, it would encourage everybody to think carefully about his or her patterns of consumption. Even more important, it would make investment in the development of alternative sources of energy and in conservation much more rewarding.
Furthermore, a carbon tax along these lines has the advantage that it does not require complex international negotiations for it to be introduced. It can be done unilaterally. Of course, the more that governments everywhere adopt such a scheme, the better it would be for the planet. But in the meantime, in order to prevent the economies of countries introducing such a tax being undermined by imports from countries operating on a ‘business-as-usual’ basis, and the migration of energy intensive productive activities to those countries, there would have to be a border tax on all imported goods on the basis of the average emissions arising from their manufacture (the revenue from which could perhaps be used to help poor countries develop low emission energy systems). Such a proposal has already brought shouts of ‘protectionism’ from big business and their supporters. But they should be ignored because it is only fair that countries prepared to do something about global warming should be allowed to protect their economies. In any case, we need to challenge the ideology that lies behind the neo-liberal economic policies that have so much benefited big business at the expense of everybody else. As I have argued elsewhere, if countries are to develop their economies optimally, governments have to be allowed to impose selective tariffs on imports (preferably subject to international agreement) – indeed it is their democratic right. But such tariffs should be kept quite separate from border taxes on carbon emissions.
Finally, it should be noted that a carbon tax does not preclude other measures to combat global warming, such as energy efficiency regulations. On the other hand, the existence of a carbon tax would likely make such other measures more effective.
After 20 years of international policy debate and protocols, and some 30 years since the scientific evidence that human generated carbon dioxide from the consumption of fossil fuels was causing global warming was first being assembled, almost no progress has been made towards doing something about it. It has been ‘business-as-usual’, with the rate of increase of carbon dioxide going into the atmosphere, if anything, accelerating. It is becoming increasingly obvious that the policies that have been advanced so far are not working. We clearly need to be doing something different. And it is urgent. The evidence is that average temperatures increasing a few degrees more will start to release the methane from methane hydrates currently locked in ocean floors and in permafrost. Methane is a much more potent greenhouse gas than carbon dioxide, and its release will turn what still is a manageable problem into perhaps a terminal catastrophe for humanity and life on earth, as we know it.
The task is to drastically reduce the amounts of carbon dioxide going into the atmosphere, and to stimulate research into the development of new technologies to produce energy without adding to the carbon dioxide already there – and to foster lifestyles and the development of equipment, appliances and transport that make more efficient use of energy. The key step towards achieving those goals must be to make the price of energy that adds to the carbon dioxide in the atmosphere prohibitively expensive. The point is fossil fuels are only cheap compared with other sources of energy because their true costs to society – their externalities in economists’ jargon – are not taken into account.
There are two major approaches towards raising the price of energy produced by fossil fuels: either the imposition of a carbon tax (charged on the basis of the amount of carbon dioxide the technology puts into the atmosphere); or so-called ‘cap-and-trade’ (that is imposing a global cap on the quantity of carbon dioxide that can be released into the atmosphere and then allocating or auctioning tradable permits to producers of energy and fuels allowing them to release carbon dioxide up to a certain amount into the atmosphere).
Economists concerned with climate change are more or less unanimous that the carbon tax approach is by far the more efficient. Yet it is the ‘cap-and-trade’ approach that policy-makers more or less unanimously have adopted. The supposed advantage of ‘cap-and-trade’ is that it sets the amount of carbon dioxide that is permitted to be released into the atmosphere and allows market prices to adjust for achieving that target. With a carbon tax, the price of carbon is fixed, but it leaves the amount of carbon dioxide released into the atmosphere uncertain, which supposedly is its disadvantage. In fact, we do not know how much carbon dioxide in the atmosphere is safe, so the target in ‘cap-and-trade’ would have to be set somewhat arbitrarily anyway (which could prove costly if set too high or too low). With a carbon tax, the rate of tax can be adjusted as new evidence came in and as new technologies were developed.
A major advantage of the carbon tax is that producers and consumers would know what the costs or savings of their actions were (for example, investing in new methods of power generation, giving up the car, heating the home less, installing insulation, and so on). When doing a cost benefit analysis, as it were, they would not be faced with the uncertainty of not knowing what the carbon price will be next month, next year, or whatever, due to the volatility characteristic of carbon prices in the ‘cap-and-trade’ system (as has been observed in practice with the embryonic forms of ‘cap-and-trade’ already in existence), which would likely be made worse by speculators.
If a carbon tax is so much better than ‘cap-and-trade’, why is it the latter that governments the world over is pushing? Even economists, after stating that the carbon tax is more cost effective, come out in favour of ‘cap-and-trade’. The simple answer is that it is because most governments and most economists are in thrall to the bankers and big financial institutions. As Cameron Hepburn, puts it (after previously stating that ‘a carbon tax appears more efficient than tradable allowances’):
"[P]ractical recommendations need to start from where we find ourselves, rather than where we might like to be. The institutions we have so far successfully developed are centred on emissions quantity targets and timetables. This approach has hard-won momentum, and a degree of institutional lock-in. Financial institutions within the emissions trading community, including some of the world’s major banks and hedge funds, now have a vested interest in ensuring that emissions trading continues, with tighter caps to increase carbon process and the value of their carbon assets….
While such schemes are still far from perfect, the institutional switching costs of moving from a quantity-based to a price-based scheme, such as harmonized tax, seem rather large."
Or to put it more straightforwardly, switching to a carbon tax, even though it is better, would be unpopular with big business. Meanwhile, for us consumers of energy, ‘cap-and-trade’ is more costly than a carbon tax because we have to pay for the expenses and commissions of the traders involved, including those in futures markets and other derivatives that go with such trades – which is precisely why ‘cap-and-trade’ is so popular with the big financial institutions.
A carbon tax saves on all of that. All that is required is a simple system for collecting the tax at the point of power generation or manufacture of fuels. This would require minimal administrative costs, especially as these activities are highly concentrated among a small number of large firms. In short, from the point of view of society as a whole, a carbon tax has to be the more rational approach towards controlling carbon emissions.
Of course, the extent to which the carbon tax would be passed on to consumers in the form of higher prices of the goods and services would not make it popular – except to note that the prices would be even higher in the ‘cap-and-trade’ system for the reasons just given. Then there would be the question of what the government would do with all that extra revenue? Would it be used efficiently and wisely? Would it be invested in the research and development of alternative sources of energy? In short, can we trust governments to act properly in the interest of everybody? On the evidence to date, as Hansen notes, the answer has to be a resounding no.
That is why Hansen proposes, which is what I am now proposing here, that all of the revenue from a carbon tax (less very small administrative costs) be re-distributed on a per capita basis to every citizen, with children being allocated half the amount of adults (reflecting the extent to which parents act on behalf of their children). This is the dividend element of the ‘fee-and-dividend’ approach, which is what Hansen calls the carbon tax. By distributing the revenue to citizens, it would be they who made the decisions. Those with a small ‘carbon footprint’ would benefit, while those with ‘gas-guzzling SUVs’ and air conditioners would have to pay dearly for their habit. In short, it would encourage everybody to think carefully about his or her patterns of consumption. Even more important, it would make investment in the development of alternative sources of energy and in conservation much more rewarding.
Furthermore, a carbon tax along these lines has the advantage that it does not require complex international negotiations for it to be introduced. It can be done unilaterally. Of course, the more that governments everywhere adopt such a scheme, the better it would be for the planet. But in the meantime, in order to prevent the economies of countries introducing such a tax being undermined by imports from countries operating on a ‘business-as-usual’ basis, and the migration of energy intensive productive activities to those countries, there would have to be a border tax on all imported goods on the basis of the average emissions arising from their manufacture (the revenue from which could perhaps be used to help poor countries develop low emission energy systems). Such a proposal has already brought shouts of ‘protectionism’ from big business and their supporters. But they should be ignored because it is only fair that countries prepared to do something about global warming should be allowed to protect their economies. In any case, we need to challenge the ideology that lies behind the neo-liberal economic policies that have so much benefited big business at the expense of everybody else. As I have argued elsewhere, if countries are to develop their economies optimally, governments have to be allowed to impose selective tariffs on imports (preferably subject to international agreement) – indeed it is their democratic right. But such tariffs should be kept quite separate from border taxes on carbon emissions.
Finally, it should be noted that a carbon tax does not preclude other measures to combat global warming, such as energy efficiency regulations. On the other hand, the existence of a carbon tax would likely make such other measures more effective.
Tuesday, 20 July 2010
Office for Tax Simplification - more corporate welfare on the way
The Government has today established the Office for Tax Simplification (OTS) - a seemingly temporary quango (I thought the ConDems were for cutting them - oh, not when they can appoint their mates to them*) that will report to George Osborne in time for the March 2011 Budget.
The Treasury Minister David Gauke said,
The tax system created by the previous government was overly complex and has made the tax affairs of millions of families and businesses across the UK extremely complicated
Are the tax affairs of millions of families really 'extremely complicated'? Most people are on PAYE and it's a fairly simple system that requires little input from most workers.
One could argue that tax credits are quite complex, but the new OTS "will not deal with tax credits". In fact it won't deal with families' tax concerns at all, it will only look at business taxes and reliefs. Gauke's waffle is simply a cover for helping the Tories' business chums - or, more simply, a lie.
George Osborne tells us, on HM Treasury website, "simpler, more competitive taxes will help us show the world that Britain is open for business". Indeed, Gauke also adds that the OTS will "inform us in making the right reforms to the tax system that will help to pave the way to bringing more international business to the UK".
Cut corporation taxes and the economy recovers - hey presto! - try telling that to Ireland or the Baltic states. The June Emergency Budget of course announced cuts in corporation tax down to 24%, as part of a £24.7 billion package of corporate tax breaks over five years. Expect the OTS to recommend more corporate welfare when it reports next year.
Of course, what any sensible government would establish is an Office for Tax Responsibility. The proposal is spelt out by Richard Murphy here.
*The OTS will be chaired by former Tory MP Michael Jack, with John Whiting serving as Director. Whiting advised corporations on tax policy at PricewaterhouseCooper for many years.
Wednesday, 14 July 2010
Tuesday, 13 July 2010
Finance Bill - McDonnell forces tax justice onto agenda
LEAP Chair John McDonnell moved amendments to the Finance Bill in Parliament yesterday to help tackle tax avoidance and evasion. Richard Murphy, one of the main movers behind the Tax Justice Network, reports it on his blog with some helpful commentary.
The TUC report 'Missing Billions' last year highlighted how £25bn of tax revenue is lost every year through avoidance. PCS, which represents staff working in HM Revenue & Customs, has led trade union campaigning for tax justice and their website contains lots of useful information - and you can also lobby your MP from there.
With the annual deficit at £159 billion, it is clear that the 'tax gap' should be the primary way of addressing the deficit. With PCS estimating the tax gap at £120 billion - there is huge scope to tackle the deficit, just by ensuring big business and wealthy individuals pay their way (before we consider asking them to pay more).
I also hope the tax authorities stand firm against Usain Bolt - who seems to think his quick feet should allow him to dodge tax. Let's hope the tax authorities, globally, catch up with him!
Wednesday, 7 July 2010
Low Pay and Inflation - why inequality is rising
Some new research this week showed that "In the last 10 years, inflation had risen by 23%, but key essentials cost 38% more".
This is concordant in with LEAP research on 'Essentials Inflation' last year, which showed the costs of essential goods had a higher inflation rate, which therefore disproportionately hits the poorest hardest. You can download the LEAP research on Essentials Inflation here.
This week's research into the cost of living was carried out by the Joseph Rowntree Foundation (download here). It found that a single person in the UK needs a gross income of at least £14,400 in 2010 to live to an acceptable standard. This equates to a full-time hourly wage of £7.38 - which is over 20% more than the current national minimum wage of £5.80.
The national minimum wage, as LEAP has pointed out, has increased below the rate of inflation in recent years, leaving many of the poorest workers worse off.
It is no surprise therefore that inequality is increasing in the UK and is already at levels not seen since the 1930s.
Sunday, 4 July 2010
Never forget the reason we're in this mess - and that there are alternatives to cuts
Last week the BBC's Robert Peston posted a blog on the BBC website 'The risks of forcing banks off welfare'. It's an interesting post and of itself is thought provoking - is it in bad taste when £11bn welfare cuts have just been announced? Would the 'impartial' BBC allow a blog opposing the withdrawal of welfare to human beings?
However, in his honest appraisal of the state of the banks, Peston does reveal some useful information:
While £1.3 trillion was paid out in bank welfare, the unsustainable UK human welfare bill is just £0.19 trillion per year. And here, according to Peston are the UK payback terms:
Right, so we have a annual deficit of £159 billion, and within 18 months the banking sector should repay £165 billion ... let's also remember that if it was not for these extraordinary levels of support the banks got, it is quite possible that the entire UK banking sector would have collapsed. Yet despite saving an entire industry, despite the fact we paid more to save it than it was actually worth at the time, we own virtually none of it, and control very little.
The UK bank bailout was the largest redistribution of wealth in our history. From poor to rich. The Emergency Budget consolidated that. There is a class war being waged, not by militant trade union leaders but by the state and big business.
There are of course alternatives to the Government's approach and that of its predecessor. We need to be publicising those alternatives, publicising the real reasons for the crisis and not accepting the need for cuts.
PCS has produced an excellent flyer for its members 'Our alternative to spending cuts', which could be used by any activist seeking an alternative to the cuts.
However, in his honest appraisal of the state of the banks, Peston does reveal some useful information:
"At the peak of the financial crisis in late 2008, public-sector support for the worlds' banks - in the form of loans, guarantees, insurance and investment - was equivalent to a quarter of everything the world produces, or more than $12trillion.
In the UK, support reached a maximum of around £1.3trillion, almost 100% of GDP.
"These weren't just a few handouts. This was the biggest co-ordinated financial rescue operation the world had ever seen."
While £1.3 trillion was paid out in bank welfare, the unsustainable UK human welfare bill is just £0.19 trillion per year. And here, according to Peston are the UK payback terms:
"In the UK, for example, UK banks face a deadline of the end of 2012 to repay £165bn of high-quality liquid assets supplied to them by the Bank of England under the Special Liquidity Scheme.
"And over the same timescale, British banks will have to find £120bn to pay back debt that has been guaranteed by the Treasury under the Credit Guarantee Scheme (there is an option to roll over a third of these government guarantees to 2014)."
Right, so we have a annual deficit of £159 billion, and within 18 months the banking sector should repay £165 billion ... let's also remember that if it was not for these extraordinary levels of support the banks got, it is quite possible that the entire UK banking sector would have collapsed. Yet despite saving an entire industry, despite the fact we paid more to save it than it was actually worth at the time, we own virtually none of it, and control very little.
The UK bank bailout was the largest redistribution of wealth in our history. From poor to rich. The Emergency Budget consolidated that. There is a class war being waged, not by militant trade union leaders but by the state and big business.
There are of course alternatives to the Government's approach and that of its predecessor. We need to be publicising those alternatives, publicising the real reasons for the crisis and not accepting the need for cuts.
PCS has produced an excellent flyer for its members 'Our alternative to spending cuts', which could be used by any activist seeking an alternative to the cuts.
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