The proximate causes of the meltdown for Labour are clear: rising food prices, rising energy prices, the seize-up in the housing market, the 10p tax debacle, and the perceived sense of a loss of Government direction. Unless all of these are dealt with head-on, the slide will not be reversed.
But these are only the immediate causes. Much more significant are the deeper reasons behind the collapse. For the last 11 years under New Labour the governance of society and the economy has been dominated by the neo-liberal agenda, an extension of the Reagan-Thatcher programme of the 1980s. Markets were to be given unfettered freedom and de-regulation pursued to the fullest degree possible. Privatisation was to be pushed, especially for public services, as a panacea to promote efficiency. Corporate control of the economy was maximized, while the role of trade unions and employment rights were severely restricted. Financial markets were subject to the lightest of light touches, and City of London demands for minimum tax and regulation were fostered at the expense of the manufacturing economy. Inequality was allowed to let rip and the wealth of the tiny elite of super-rich ballooned.
Every one of these facets of New Labour’s neo-liberal agenda has now broken down. Markets are now pushing food, energy and housing prices beyond the reach of the poorest and badly squeezing even middle-income budgets. De-regulation has now led to the massive dissemination of near-worthless financial derivatives, credit rating agencies being paid by those they are supposed to assess, and reckless mortgage lending by the banks. Privatisation has bred endless scams like independent treatment centres in the health service being paid even when they didn’t do the work, and the Metronet stitch-up on the London tube of the five big corporates holding the equity parcelling out the contracts among themselves without competition and leaving the taxpayer with a £2bn bill. Suppression of the unions has left the UK workforce working the longest hours, protected by the weakest employment rights, and experiencing the greatest insecurity of any country in the EU. The City of London bonus culture has run riot to the chagrin of even the highly paid middle class, while manufacturing, the life-blood of the nation, has lost a million jobs over the last decade and is slipping into ever deeper trade deficit.
The local election results betoken not merely a hiccup in an otherwise vibrant system, but a systematic breakdown in the economic fundamentals. This requires a major change of policy and direction at four different levels.
Most immediately, the 10p tax fiasco, which crystallises more than anything else Labour discontent at the failure of Labour Government to represent them, must be redressed promptly and comprehensively. Gordon Brown should immediately make a statement that all those disadvantaged will be fully compensated with back-dating to 1st April. Even better would be to re-introduce the 10p tax rate, to the benefit of the low-paid, and pay for it either by ending tax reliefs on pension contributions above the standard rate or by taxing foreign owners of commercial property, requiring declaration of all share dealings on the Stock Exchange for CGT, and assessing all short-term asset-trading for income tax rather than CGT. Other ways by which those currently feeling the biggest pinch could be helped are by raising the national minimum wage from £5.52 to £7 an hour, and by bringing forward the earnings link for pensioners.
Second, raw capitalism has been allowed to run amok and re-regulation is clearly needed to stabilise financial markets. It should be no more than is strictly necessary, but it should include new capital adequacy ratios so that credit creation does not get out of hand, credit rating agencies that are wholly independent, and a requirement that financial derivatives should have to be first approved by the Financial Services Authority.
Third, the only alternative to unfettered capitalism that has led to excessive concentration of both economic and political power is a modern reformulation of social democracy. Clearly there is now a need for intervention in the markets to protect consumers in the public interest against corporate and market excesses. Nor is market intervention unknown to the present Government; it’s just that it has been used this year for the wrong end – to enforce a real terms pay cut on the police, teachers and low-paid civil servants.
When mega profits are currently being made in the food and energy sectors at the same time as a third or more of the population cannot afford their food and fuel bills, intervention should be used instead to make markets work fairly. For as long as soaring food prices last, supermarkets should be required to provide hampers of good-quality food for pensioners and others on benefit at cost price or below. A social tariff should be fixed for pensioners and low-income families so that they can purchase gas and oil at below-market price that they can afford. When home-owners are repossessed through no fault of their own, the State should step in to buy the house so that they can remain in it as rent-paying tenants. When there is such desperate shortage of social, affordable housing, the house-building industry should be required to provide for low-income families at least 10% of the houses they build each year and at below-market prices such families can afford. And when corporate power is today so over-dominant, it should be balanced at least by agency and temporary workers receiving the same rights as full-time workers.
A fourth level at which the anger and despair so manifest in the local elections has to be addressed is by reconnecting Government to electors who feel cast adrift. It is repeatedly said that this Government will be a listening Government, but people need the evidence that they are being listened to when Government actually changes course. The encroachment on civil liberties by a police surveillance state is widely seen as having gone too far, but is the Government prepared to withdraw ID cards, excessive travel checks, or gratuitous storage of personal information on Government data-bases?
Most people think that detention without charge for 42 days will not increase security, but withdrawal of British troops from Iraq would: will the Government listen? Again, it is a commonplace that people want more empowerment. The Government could send out a radical message here by giving ombudsmen or regulators much more power to respond quickly and effectively to public complaints against banks, utilities, police, and private corporations, and to award significant compensation where justified. Accountability in Britain has all but collapsed, and restoring it would be highly popular. But Gordon, are you listening?
Whither then accountability in this country? The Equitable Life fiasco and the ETS school tests debacle, both in the headlines today, spell out starkly a major endemic failure in British institutions which ought to be high on the reform agenda. That yawning failure is that responsibility when things go wrong has all but collapsed and virtually nobody is ever held to account.
The Parliamentary Ombudsman’s report on Equitable Life comprehensively pans the regulators as “passive, complacent and ineffective”, on top of the gross mismanagement by the company itself in the first place. The American firm ETS (another flagrant privatisation failure) not only served up its exam markings very late, but badly mismanaged the whole exam process (claiming hundreds of pupils had not sat the tests when they had) and used people to mark the tests who were completely unqualified. Will Equitable Life be made to pay or the regulators sacked? Will ETS be subject to punitive fines and its 5-year contract (after this first disastrous year) be abruptly terminated? Don’t hold your breath.
Nor are these isolated examples. Take five recent events – 90 people dying from c.difficile at Maidstone and Tunbridge Wells Trust hospitals, the torture and murder of Baha Musa by 7 British soldiers in Basra, the failure to repair the drains at Pirbright which came within an ace of another foot and mouth outbreak, the shooting of Jean-Charles de Menezes at Stockwell, and losing a lap-top containing details of 600,000 potential recruits to the armed forces? What is the link between them? Nobody was held responsible.
As power has become ever more centralised over the last three decades, the checks and balances have withered. Parliament is now weaker vis-à-vis the Executive than at any time in living memory, and major Ministerial gaffes of policy or management (as opposed to sex or money scandals) are rarely treated as a resigning matter. Enormous over-spends of taxpayers’ money on tax credits (£2bn), the Olympics (£6bn) and Government IT projects (£10bn plus) aren’t held to account. After the Iraq war no debate or vote was held to scrutinise its conduct or aftermath. Outside Parliament, redress for consumers’ complaints against the police, judges, private utilities, banks or the postal system, whilst treated politely, are rarely effective.
Secondly, neo-liberal markets rule, and any regulation at all is determinedly light-touch. Despite Northern Rock exposing disastrous flaws throughout the banking system, no Committee of Inquiry has been set up to remedy these highly damaging failures in governance and transparency. Equally, the Planning Bill currently going through Parliament removes all democratic accountability from approval for all major infrastructure projects, whether nuclear reactors and nuclear waste dumps, incinerators, airports, or big road-building programmes.
Codes of Practice for industry, where they exist, are voluntary and therefore ineffective. The voluntary Ethical Trading Initiative, to stop Oxford Street stores trading on developing country sweat-shops, is unenforceable and repeatedly breached. The Code proposed a few months ago to curb excessive secrecy and profiteering by private equity firms is, risibly, a voluntary one. Recently it was reported in Which? magazine that NHS patients do not see the point of complaining because of the risk of victimisation. And where consultations of public opinion are held – as for example on nuclear energy, GM foods, or the third runway at Heathrow – Government still goes ahead even though it didn’t get the ‘right’ result.
In the private sector too, Metronet, which ran three-quarters of the PPP London Underground refurbishment programme, racked up a projected overspend of £2bn after awarding the contracts to its own building consortia shareholders, but nobody was sacked and the taxpayers bailed them out. The ITV phone-in premium-rate competitions extracted £8m from viewers by deception, but nobody was dismissed over the scandal. Nearly 9,000 homes and businesses in Hull were badly flooded last June because Yorkshire Water failed to act on several warnings of disaster over the previous 11 years, but no heads rolled.
Why does this happen? There is regulatory capture by the vested interests, or the regulators lack clout in terms of staffing and finance compared with those they’re targeting. The penalties are often grossly inadequate to have real impact. Regulators, usually chosen by civil servants, may be selected so as to give Government a quiet life and not upset the apple-cart too much. A Commission of Inquiry is needed to rectify these flaws and to lay down adequate ground-rules for regulatory effectiveness. Or, better still, public ownership should come back on the political agenda as a better way of running things.
Meanwhile, regulators should be required each year to report publicly on what they have achieved and how all the main complaints have been handled, and there should be regional meetings at which the public can cross-question those who regulate on their behalf. Parliamentary Select Committees should summon regulators to public hearings where there is significant public disquiet about their efficacy. And we need a public debate on the necessary powers of enforcement and range of effective sanctions and penalties (including removals from office where appropriate) which would command public support.
Gordon Brown has helpfully pre-published the government’s draft legislative programme for 2008/9. But it deals with none of the really big problems now facing Britain.
The biggest concerns the breakdown of the neoliberal economic order and the banking crisis now dragging down the real economy. Structured investment vehicles, which carried the sub-prime securitised contagion across the world, should either now be banned or have to be approved by a much-revamped, and more robust, Financial Services Authority. Credit-rating agencies should be prohibited from being paid by the institutions they assess for creditworthiness, as scandalously happens now, in order to block any conflict of interest.
The gigantic City bonuses should be regulated by the Bank of England, to stop the creaming-off of a wholly artificial financial froth. Investment banks should be legally separated from commercial banks. Robust capital adequacy ratios are also urgently needed if western banks are not to be forced in future, like Northern Rock, to go cap in hand to be bailed out by government (and the taxpayer), or by sovereign funds from China, Asia or the Middle East. Will the government tackle any of these fundamental problems of the neoliberal economy? Unlikely when New Labour is itself the political wing of neoliberalism.
The second major breakdown in the state lies in the steady accretion of power to the centre over the past 30 years and the virtual collapse of accountability in this country.
To make scrutiny of the government much more effective, members of select committees should not be chosen by the whips, but elected by a secret ballot of all non-executive members of the House in accordance with party quotas, and should then elect their own chair. Select committees should have the right, by negotiation between themselves, for one of them to table a motion for debate and vote on the floor of the House once a month (as in the French national assembly). The prime minister’s nominations for the cabinet should, as in the US Congress, be subject to ratification by the appropriate select committee. And parliament should be empowered and funded to set up its own parliamentary commissions of inquiry (as happened in Victorian times), for example in cases of extraordinary rendition and torture.
Democratisation is just as necessary in wider society outside the House. In the past few months, discs containing the sensitive personal details of 25 million people have been lost; Metronet’s tube refurbishment programme went bust, leaving the taxpayer with a £2 billion bill; a disc containing DNA profiles of more than 2,000 people linked to serious crimes abroad went unchecked for a year by the Crown Prosecution Service; Northern Rock has cost the taxpayer £25bn but the former chief executive walked away with a bonus of £750,000; the National Audit Office recently found that the Ministry of Defence had spent at least £400m on eight Chinook helicopters that were still not airworthy 13 years after being ordered; and so on, and so on. What is the common link between all these examples? It is that nobody was ultimately held responsible.
Why has this collapse in accountability occurred? There are several reasons. Civil service liability is shielded by the myth that the minister is always responsible. The regulators, especially in the Treasury, are given too little staffing and funding to be really effective in pursuit of the endemic culture of tax evasion, avoidance and quasi-embezzlement of public funds. And in the unfettered neoliberal economy now imposed on us, the big companies and big financial institutions have largely captured the state – whatever they demand, they usually get, and where they mess up, as they have done big-time over the credit crunch, nobody is held accountable and the state picks up the rap, as we repeatedly see.
This article originally appeared in Comment is Free on Tuesday, 8 July 2008.
Gordon Brown meeting Britain’s oil chiefs to discuss higher North Sea output to bring down prices is prompted by oil prices hitting a record high of $135 a barrel, twice as high as a year ago and a staggering 12 times higher than a decade ago. The well-sourced website petrolprices.com is now predicting that petrol will reach £1.50 a litre by September, just 4 months away. Jeff Rubin of CIBC World Markets is forecasting “oil prices almost doubling over the next five years”. That would mean $270 a barrel by 2013. It perhaps explains why the government is now strongly backing BP to get a big new slice of the oil drilling licences soon to be issued in Iraq, and – astonishingly – has now also made clear it intends to annex a third of a million square miles of the seabed off Antarctica to pre-empt any rights to the oil it may contain. The fight for oil has begun in earnest.
But is there the oil to go round? The authoritative International Energy Agency foresees an oil supply crunch within 5 years forcing up prices to unprecedented levels and greatly increasing western dependence on Opec. And the oil industry itself in its own report Facing the Hard Truths about Energy, produced by 175 authorities including all the heads of the world’s big oil companies, for the first time predicted that oil and gas may run short by 2015.
The geopolitical implications of this gathering crisis for world oil supply 2010-15 are immense. The risk of further military interventions and conflicts in the Middle East is clearly high. Total world oil reserves are estimated at 2.5-2.9 trillion barrels, of which half has now been already consumed, while half of the 51 oil-producing countries reported output declines in 2006. Non-Opec production is expected to peak and decline within the next five years, driven mainly by burgeoning demand from China and the US, together with restricted output from Iraq. Then in the following five years Opec’s diminishing spare capacity will probably become increasingly unable to accommodate short-term fluctuations, depending on how fast world demand grows and how extensively Opec invests in new capacity. The latter may well not raise production capacity high enough or quickly enough, whether for political reasons or because internal decision-making is too slow or the security environment too hostile.
There are of course exits from this doom-stricken scenario, though none is at all credible. First, discovery of major new oilfields could alter the picture. However, though billions have been spent on the search for new fields, discovery peaked in the mid-1960s and the last big ones were found in the 1970s. Only Iraq has undeveloped super-giant oilfields – at West Qurna, Athabascan tar sands (from Alberta, Canada), extra-heavy oil (from the Orinoco belt in Venezuela), oil shale, and mature source rocks. But the almost insurmountable problem is recoverability, whether poor quality oil (extra-heavy oil), poor quality reservoirs (oil from source rocks), or both (oil shale). Worse, production may be uneconomic because of a very low net energy gain, ie it requires almost as much energy to extract the oil as is made available for subsequent use. And the enormous hike in greenhouse gases generated could produce a turbo climate change effect that would wipe out any benefit from a global post-Kyoto agreement.
But even if supply constraints are ineluctable as the explosion of Chinese growth coincides with falling non-Opec oil production and the beginnings of a slow but remorseless slippage in Opec capacity, the coming crisis could still be eased by significant demand restrictions. Clearly there is substantial room for energy-saving when half the energy generated every day is wasted and when propulsion of an average car is only about 20% efficient, heating of a standard oven only 25%, and electricity generated in some power stations only some 35%. The question, however, is whether improvement can be secured globally on the level and timescale required to push back the crisis more than a few years. Equally, taking the CO2 out of fossil fuels, especially coal, may be crucial, but a decade at least is needed even to test the carbon capture technology in pilot projects, let alone begin to mainstream it. But the most direct means of constraining world demand would be the proposed Rimini protocol, which prescribes that oil-importing countries cut their imports to match the world depletion rate (ie annual production as a percentage of remaining global reserves) now running at about 2% a year. Of course, the fundamental political problem remains that the most powerful oil-hungry countries will not agree. If not Kyoto, why Rimini?
What is most disturbing of all is that the big powers, so far from seeking major adjustments of their energy policies on either the supply or demand fronts or making a major switch into renewables, are actually massively intensifying their competitive struggle short-term for the limited oil reserves left. Despite an unwinnable war in Iraq, the US is still constructing at least five large permanent military bases there in order, according to evidence given to a US Congressional Committee, to control access to Gulf oil, including in Saudi and Iran. As one neocon recently put it, “one of the reasons we had no exit plan from Iraq is that we didn’t intend to leave”. The US is also trying to force through a new Iraqi oil law that would give western, primarily American, oil multinationals control of Iraqi oilfields for the next 30 years.
The US maintains 737 military bases in 130 countries under cover of the “war on terror” to defend American economic interests, particularly access to oil. The principal objective for the continued existence and expansion of Nato post-cold war is the encirclement of Russia and the pre-emption of China dominating access to oil and gas in the Caspian Sea and Middle East regions. It is only the beginning of the unannounced titanic global resource struggle between the US and China, the world’s largest importers of oil (China overtook Japan in 2003). Islam has been dragged into this tussle because it is in the Islamic world where most of these resources lie, but Islam is only a secondary player. In the case of Russia, the recent pronounced stepping up of western attacks on Putin and claims he is undermining democracy are ultimately aimed at securing a pro-western government there, and access to Russian oil and gas when Russia has more of these two hydrocarbons together than any other country in the world.
The struggle has also spilled over into West Africa, reckoned to hold some 66 billion barrels of oil typically low in sulphur and thus ideal for refining. In 2005 the US imported more oil from the Gulf of Guinea than from Saudi and Kuwait combined, and is expected over the next 10 years to import more oil from Africa than from the Middle East. In step with this, the Pentagon is setting up a new unified military command for the continent named Africom. Conversely, Angola is now China’s main supplier of crude oil, overtaking Saudi Arabia last year. There is no doubt that Africom, which will greatly increase the US military presence in Africa, is aimed at the growing conflict with China over oil supplies.
As Joe Lieberman, former US presidential candidate, put it, efforts by the US and China to use imports to meet growing demand “may escalate competition for oil to something as hot and dangerous as the nuclear arms race between the US and the Soviet Union”.
This article originally appeared in Comment is Free on 29 June 2008: http://www.guardian.co.uk/commentisfree/2008/jun/29/oil.oilandgascompanies
With Revenue and Customs paying an informant to expose secret accounts in the Liechtenstein tax haven, it might seem that the war on tax avoidance is gearing up.
But even if this results in recouping some of the £100m in back taxes owed by the super-rich it is still a flea-bite considering that a TUC study a month ago found tax avoidance by Britain’s biggest companies and wealthiest individuals now amounts to £25bn a year. The Tax Justice Network has also recently documented that the wealthiest people in the world hold a staggering $11.5 trillions of assets in tax havens.
But what is novel in Britain is the way that wealth and power over the last decade have been consolidated in a tiny new class at the top. They are epitomised by the egregious earnings of Stephen Schwarzman, chief executive of Blackstone private equity, who took home £200m last year (£3.85m a week). But that is only the extreme example of a new hyper-wealthy elite marked not only by extravagance of personal consumption, but also by a hold on economic and political power rarely if ever equalled in the past.
Britain now has five distinct classes. The poor, conventionally defined as those with less than 60% of median earnings, have to get by on less than £217 a week. But included with them should be the 1.5m people whose household incomes are no more than £10 above that, and constantly afflicted by insecurity.
Next come the largest class, those around the median income in Britain today of £23,600 (or £454 a week). This embraces a wide range of occupations from sales assistants and retail check-out (£240 a week), through nursing assistants, secretarial, security work, plant and machine operatives, electrical and construction, civil service executive grades, sales reps, to nursing, police and fire service (around £520 a week). Mostly they are secure, though at the lower end they remain vulnerable to economic downturns or if housing equity turns negative, as it may well be about to do for several tens of thousands.
Then comes the comfortably off managerial and professional class. Middle class is now too diffuse a term to be accurately descriptive, and would now be seen as including many in the previous category. But the professional-managerial class includes those in teaching, health and engineering (from £650 a week), through marketing and sales managers, production managers, up to corporate and senior management (around £1,670 a week).
In the higher reaches of the income scale there has always been a rich class, which might be arbitrarily defined as the top 5%. Numbering 1.4m, their income, according to the latest official Survey of Personal Incomes, averages £96,000 a year, with average investment income on top of that of £12,400 (totalling therefore £2,085 a week). Some might think, however, that the real rich category is confined to a much smaller group, say the top 1%. Their average earned income is now £220,000 a year plus £35,200 investment income, so they take home just over £4,900 a week.
However, a wholly distinct class has now developed at the very top end of the income scale which is entirely separate in the influence it wields through being embedded in the power structure at the highest levels. Even this class, tiny though it is, contains a vast range. At its lower end it starts from the top 0.1%, numbering just under 30,000 persons, each with an average earned income of £754,000 plus £146,000 investment income a year (just over £17,300 a week). It then rises into the stratosphere. The latest annual survey of the chief executives of the top 100 FTSE companies shows them taking home on average £2.8m a year (£53,485 a week). But that is only the average in these ultra-select and powerful groups. The top end, represented by the £27m (£519,230 a week) paid to Bob Diamond of Barclays Capital, is seen by many as greed incorporated when living in the same society are those on a minimum wage of £198 a week. A ratio between top and bottom incomes, which was less than 50:1 only 30 years ago, has now risen to 2,620:1.
What is even more striking is that these Babylonian excesses are now locked in more closely than ever to the exercise of power. In the last few years this has been exemplified by the rise of private equity. Buying up large public companies with huge debt leverage, selling off the property portfolio to transfer the debt to the company, and cutting costs via large-scale redundancies is the economic and personal price paid by others to secure the 2% annual management fee plus 20% of the profits for the private equity partners under the so-called “carried interest” system from which they can extract £20m or more apiece.
There are countless illustrations of this intertwining of wealth and power at the highest levels. The taper relief loophole by which top executives pay tax at a lower rate than their office cleaners was closed in 2003, but private equity was uniquely given exemption by the government. Sir Ronald Cohen, a guru of private equity, remains a close friend of Gordon Brown, who has also just appointed Damon Buffini, boss of Permira which recently loaded AA and Debenhams with huge debts and job losses, to his new Business Council of Britain.
The indefensible non-domicile tax loophole, which benefits some 60,000 hyper-rich individuals with personal fortunes reckoned to total £126bn, has only survived intensive lobbying against it in the past because its beneficiaries persuaded Brown as Chancellor that the privileges of the City must be protected at all costs. And the storm over cash for peerages further exposes just how far wealth now suborns the governing process in the hope of underhand reciprocal gain.
There is now increasingly a consensus, even among the well-off, that these excesses of power and wealth have gone too far. There is even a substantial degree of cross-party support in the Commons that the tax asylum seekers slipping through the net via non-domicile tax status should be brought to book by ending this loophole. The Treasury Select Committee recently reported that the taper relief concession for private equity buccaneers should be modified and “carried interest” treated for tax purposes as the income it clearly is. As the credit crunch consequences bite ever deeper into the incomes, not only of the poorer half of the population, but also of not-so-wealthy Middle England, the cry against greed incorporated will get a lot louder.
This article appeared on Comment is Free on 20 June 2008: http://www.guardian.co.uk/commentisfree/2008/jun/20/taxavoidance.privateequity