Britain: A few home truths

I was born and bred in Britain and have lived here all my live. I am not ideologically pro or anti-Europe, though on pragmatic terms I have generally seen Britain being in Europe as good thing and never really understood why we feel the need to get vetos on everything. With Cameron’s actions this week, I thought it useful to point out how un-independent Britain is.

Yes we used to have an empire, perhaps we did rule the waves once, but not any more. Here is my view modern Britain for those who think somehow leaving Europe is a good idea.

1. Manufacturing in the UK is about 12% of GDP, but much of this is foreign owned, such as car plants by Toyota, Honda and Nissan, and much of the output is exported. Due to the poor lending record of UK banks to manufacturing for decades, UK companies also may have to go abroad for capital, which then may make them more likely to end up foreign owned.
2. Many of the previously nationalised industries are now foreign owned. For example, Welsh and some English trains are run by Germans (Deutsche Bahn). In Electricity and Gas, the Germans own NPower, Eon and Powergen, the French EDF Energy and the Russians Centrica. Cadbury is also now foreign owned by Kraft (USA), and the trend for foreign ownership is increasing rather than decreasing.
3. Much of whatever it is the City of London does is international, some in Europe, and accounts for 30% of GDP.
4. Around half of our Exports go to Europe (October 2011 figures)
5. Tourism is important the British Economy, with the bulk of visitors coming from Europe.
6. We import more than we export (October 2011 figures)

I don’t understand the ins and outs of all the above, but what is clear to me is that though Britain is an island geographically, it is not economically. Anything that damages our terms of trade or relationships internationally, particularly with Europe, doesn’t just impact the City of London, but potentially everyone in the UK. I hope David Cameron has at least some understanding of this.

“Public Sector Bad, Private Sector Good”

Back when there was a Conservative government in the UK in the 1980s, I coined the phrase “Public Sector Bad, Private Sector Good” to sum up the desire to sell as much public property off as possible as it will be miraculously saved by the private sector. Now with the new Coalition Conservative government, this mentality has all come round again.

At the start of the 1980s, the UK did have more in public hands than most countries with water, telecoms, gas, electricity all nationalised, but now these are long since in private hands, the Conservatives are looking to sell off whatever is left. much of which is really about public service provision, such as the NHS.

So is “Public Sector Bad, Private Sector Good”. I say no for the following reasons

• Private sector companies exist to maximise their profits, which public sector entities may not need to make a profit at all. Profit from a public sector entity can be also offset against subsidies. The argument for this would be that having to make a profit makes the company more efficient, but if a service goes from not having to make a profit to making a profit, the service has to cut costs to make any profit at all from the same money.
• There is not generally some magic way that private sector companies can save money that public sector entities cannot, so it is down to general cost cutting strategies
• One key way to cut costs is to cut wages either in pay rates or the number of staff employed. Ask any cleaner who has been ‘contracted out’ and they will tell you the first thing that happens is their pay goes down.
• Another way to cut costs is to cut back on investment in infrastructure and other capital costs. Railtrack was rightly castigated for cutting back on maintenance which cause the Hatfield and other crashes, but arguably they were just looking to save some money to increase their profits.
• Private companies are also likely to pay their senior staff more than public sector companies, making cuts further down the organisation more severe.
• So the net effect of putting public services in the private sector is that less is spent on the service and the rest is taken as profit.  If that is so, keeping it in the public sector seems a better idea to me.

I am not against private companies, I work for one. However, in the realm of public services, particularly where public subsidies are involved, I think that in many cases keeping them in public hands provides a better value service, simply because they do not have to make a profit. Even if the public sector was less efficient than the public sector, they could still save public money in delivering public services, simply because they do not have to make a profit.

Inflation

Today has been another one of those days that comes each month where UK inflation has risen again, poor old Mervyn King has had to write a letter to George Osbourne explaining it again, with the associated speculation that interest rates must rise soon to curb this inflation. There are two questions that occur to me about this that don’t seem to be mentioned on the news:

1. Who set the target at 2% anyway?

The answer would seem to be Gordon Brown in 2003. That was 8 years ago, so perhaps the target rate is due a review, in light, for example that VAT, fuel duty and other duties are now higher than then, as well as global commodities such as oil. It was also apparently changed partly to make joining the Euro easier in future.  Surely the coalition could blame this ridiculously low target inflation rate mess on the previous government, just as they do most other things on a daily basis, while adding a bit of ‘we’ll never join the Euro anyway’ rhetoric and get this target raised. A higher inflation target means that there is not so much of a ‘problem’ with inflation, which seems now to have just recovered its trajectory from before the recession.

2. Would raising interest rates have any effect on inflation anyway?

Mervyn King’s reasons for the latest rises were the VAT rise, rising global commodity prices and the weakness of the Pound. None of these would seem to be affected by a UK interest rate rise, which would give marginally better rates to savers, but also reduce the disposable income of most people on a mortgage, who are already being squeezed by inflation, tax rises, and possibly insufficient wage rises (including me). With growth negative, people potentially saving more and spending less due to higher interest rates wouldn’t seem to be a good idea.

Perhaps the big question really is whether the idea that changing interest rates to control inflation within a country is actually valid any more in today’s global world where so many factors that may influence inflation are outside of a country’s control.

What I would like from the new UK coalition government

1. Fairer Votes

It cannot be right that a large majority of seats in the House of Commons can be obtained with a minority of the vote, though I understand why Labour and Conservatives would like to keep this situation out of self-interest. The UK always votes for a hung parliament, they just don’t normally get it. Alternative Vote (AV) is a step in the right direction, but I would prefer a proportional system such as Single Transferable Vote (STV). This would end tactical voting, and may encourage the third that didn’t vote in this election to do so. I am a long term supporter of several organisations involved in taking back parliament, including Unlock Democracy and the New Economics Foundation.

2. The Deficit

I would urge some caution  in cutting the deficit too quickly. The UK economy is complex and difficult to predict, but I can see that increasing taxes on spending (e.g. VAT) or on jobs (e.g. National Insurance) could lead to a double dip recession, as could further loss of jobs. I don’t think anybody really knows what will happen,  but what the markets think isn’t the only factor, though it seems to be more important in the new government’s eyes.

3. Banking

I think that retail and investment banking should be split, in order that the productive part can be kept separate from what I believe Adair Turner called the ‘Socially Useless’ part. Banking to support the ‘real’ economy should be encouraged and protected. The more gambling side of investment banking should be split, Bank of England guarantees removed, and this left to fend for itself. I can see that a Banking Levy is  an easy way for governments to raise some cash at this time, but I think it will do little to change the behaviour.

4. Identity Cards and Privacy

I have been supporting NO2ID to get rid of identity cards. mainly because I think they are a colossal waste of money, but neither am I keen to see all sorts of my data centralised. It is good to see that the new coalition is planning to scrap these, so we will see what happens with this.

5. Lobbying

I am under the impression that the relationship between corporations and government has become a bit too cosy over the last few years, with government largely doing what companies want. I think the proposed lobbying register may help with this. Corporations only have obligation to their shareholders, governments have much wider obligations that they should be strong in keeping.

6. Environment

I am a long time supporter of both Greenpeace and Friends of the Earth, and have long been concerned about our impact on the environment. I am pleased that the new government has signed up to 10:10, which I have as well, and also that the third runway at Heathrow is to be scrapped. I am bit concerned about Nuclear Power stations, which apart from any waste, are not economically viable as far as I see, though at least no public money seems to be promised for this.

7. Trident

I think that we should scrap Trident. What is the point of spending almost £100 billion pounds on something we will never use? Perhaps it keeps us in some nice exclusive club, but I don’t see the point. This is why I have been supporting CND for a fair few years now.

Why retail and investment banking need to be split

Today RBS announced a loss of £3.6 bn while paying bonuses to a few employees totalling £1.3 bn.  The loss was down to bad debts, and the bulk of their profits made before this is accounted for came from investment banking (5.7 bn of 8.3 bn).  The results were better than expected, and so good, you may say. I say no, and I will now explain why.

I have been recently having a lot of work done on my house, mainly a new kitchen and bathroom. I have taken out a loan with my bank to cover a lot of the cost. The bank is not lending me this for nothing. They are charging me interest and making a profit from it. However, as well as improving my house, this is providing direct and indirect benefits. I am employing a local firm and there is one person I am providing a few week’s worth of work for along with odd days of work for electricians, plasterers and other specialists. These people are in turn buying kitchen units, bathroom units,  and other items that are supporting often British companies and indirectly jobs. Thus as well as turning a profit for the bank, this is helping indirectly potentially a wide number of companies and people. The same could be true of business lending, which may directly provide jobs, and then indirectly help suppliers.

Now I’m no expert on investment banking but it seems to be me it is basically ‘speculate to accumulate’, buy something now (possibly with borrowed money) and then sell it later at a higher price, probably in increasing clever and ingenious ways. However, such behaviour has no impact on the UK as a whole, it just seems a bit of a private club for printing money, unless it goes wrong of course. Now I can understand the appeal of banks of what is effectively easy money, but I do not think that I as a UK taxpayer should be guaranteeing this in any way shape or form. While investment banking is mixed up with retail banking, this is very difficult to avoid guaranteeing. Now you could argue all these millionaire bonus recipients today are going to spend some of that money and thus help the wider economy, but I suspect the effect is trivial compared to the wider effect of lending money to many people spending money like I have recently.

So my proposal is this:

• Banks must be split into separate retail and investment banks.  I don’t mind if they share the same parent company but they must be financially independent. In other words, the investment bank cannot take money from the retail bank or vice versa and they must report separately.
• The taxpayer should only guarantee the retail banking side. If the investment bank takes too many risks that don’t work out, and they go bust, so be it. The effects on wider UK society of this are likely to be minimal. If the investment bankers want the ‘market rate’ I keep hearing about, they must be prepared to suffer the down side of the market, rather than expect to be propped up by the State.
• The Banks should be obliged to provide lending and other facilities to retail customers, and in ways that can be enforced, unlike the current situation. Their role should be be regulated as providers of finance to the wider economy, rather than just profit maximisers in their own right.

I don’t think the banker’s have learnt anything in the last few years, and Banks desperate to turn some form of profits seem to turning more to their investment arms for profits, while not lending as much on the retail side as they could. The result could easily be another crash in a few years, before we the taxpayer have paid off the last crash, and the country can’t afford this. We need to split retail and investment banks to make sure that taxpayer help in such situations is in protecting businesses and consumers, not a minority of investment bankers.