Oil profits, over-high petrol prices and fuel poverty
Shell’s record quarterly profits announced yesterday of £6.7bn (over £20bn a year), following on BP’s record quarterly profits announced the day before of £6.4bn (also over £20bn a year), demands a response from the Government on three specific grounds.
First, it is unfair to the poor. Fuel poverty (expenditure of more than 10% of household income on fuel) now stands at between 4-5 million. Second, it is unfair to the motorist. The price of oil has fallen 56% since its peak in July, yet the price at the pumps has fallen by only 18% over the same period. Third, it is unfair to the taxpayer. When both business and households are now under severe pressure in the downturn, it is unacceptable that one group can make huge unmerited profits out of a global oil shortage and yet escape passing on a fair share in an economic crisis to the wider community. There are also precedents: Labour’s £4.5bn windfall tax on the private utilities in 1997 as well as the Tories’ windfall tax on the banks previously because of unearned profits from rocketing interest rates.
The oil companies must not be allowed to hold the country to ransom. A Robin Hood tax could take different forms. Gordon Brown has opposed a windfall tax on the grounds that he announced several years ago that he would not raise Petroleum Revenue Tax further, but that was in ‘normal’ times before the highly abnormal ones of this recession. Exceptional times deserve exceptional policies, as he himself rightly said.
Or, whilst avoiding taxing when energy prices are high, the Government could claw back some of the gains, estimated at £9bn, which will accrue to the energy companies through being given 100 million free permits to trade greenhouse gas emissions under the second phase of the EU Emissions Trading Scheme 2008-12. Ofgem has supported this, and Spain is already doing this.
It would offer a double whammy: help Britain’s climate change targets and fund lower social energy tariffs for low-income households as well as much more extensive energy efficiency measures. It is justified when windfall profits will be highest in countries with liberalised energy
markets where costs can be easily passed on to customers, where coal dominates, and where there are high levels of free allowances. All three conditions apply to Britain.
I shall raise this demand in an EDM on Monday, in a letter to Alistair Darling in preparation for this Pre-Budget Report next month, and at PMQs.
Oil profits, over-high petrol prices and fuel poverty
In all the kerfuffle over the gross lack of taste from Ross and Brand, one body has been invisible: the BBC Trust. What exactly is it for? For over a fortnight after the offending broadcast they have apparently not responded. Surely this is not simply a matter to be left to the Director General. It is widely agreed that if the BBC had reacted a lot faster, it would not have escalated into the major row it has now become. So where was the Trust when they were most needed?
It is all very well for the BBC to be promoting ‘edgy’ programmes in pursuit of wider metropolitan youth audiences, but this was predictably bound to raise sensitive questions about where to draw the line between comic send-ups and offensive breaches of taste. Even apart from the risqué role of Jonathan Ross as agent provocateur, the drift towards a more polarised and fragmented society in Britain readily prompted questions about how such developments could be reconciled with the BBC’s key public service broadcasting role. Where was the Trust in all this?
This episode raises again the important issue of the collapse of accountability in Britain today. The frameworks for supervision and holding account those responsible at high level are simply not working. This is not an isolated example. The exiting of top executives with huge pay-offs after dramatic failure, the shooting of Jean-Charles de Menezes at Stockwell, the repeated loss of vast amounts of sensitive personal data on lap-tops or CDs, the failure to carry out drains repairs at Pirbright which came within an ace of unleashing another disastrous foot and mouth outbreak, the torturing of Iraqi personnel in Basra, the winding up of the Serious Fraud Office inquiry into BAE, and the weakness of regulatory action in many spheres most notably in the lead-up to the current financial turmoil – all these recent cases illustrate in a whole variety of different ways the central point that those carrying the real responsibility have not been held to account.
One way to redress this would be for Parliamentary Select Committees to be much more proactive in exercising their prerogative to summon key top decision-makers, where appropriate, to appear before them in open session to explain and defend their policies and position where major public issues have arisen or seem likely to arise. Perhaps a start could be made with the BBC Trust and its chairman.
200,000 HOUSEHOLDS in 2006 HAD PRICE-TO-INCOME MORTGAGES GREATER THAN 6 TO 1
The scale and depth of negative equity, and the recklessness of the mortgage lending generating it, are revealed in the latest figures from the Regulated Mortgage Survey and Council of Mortgage Lenders. They reveal that in 2006 no less than 201,078 households were granted a mortgage that year (18% of the total) with a price to income ratio greater than 6 to 1. Of these, 80,289 (7% of the total) were lent mortgages with ratios in excess of 8 to 1, and 37,937 (3.34% of the total) actually had ratios in excess of 10 to 1!
These are staggering figures. Not only do a third of all the 11 million households with a mortgage have a price to income ratio above 3 ½ which is widely regarded as the upper safe limit, but half that number of households have ratios over double the safe limit.
Nor was 2006 the worst year in terms of numbers of families over-extended with their mortgage commitments. In 2004 the figures were even higher. That year 309,170 households were granted mortgages (a stunning 25% of the total) in excess of the 6 to 1 price to income ratio, including mo less than 62,931 households (5% of the total) in excess of 10 to1.
It is clear from these figures that the extent of negative equity substantially exceeds that at the nadir of the 1990-1 recession, and that the depth of that negative equity is also much greater than ever before.
There are three immediate lessons. Measures to protect home-owners from repossession have to be a great deal tougher than those already announced by the Government, including the right to switch to tenancy status to preserve their home. Secondly, we need a public sector bank specialising in mortgage lending to low-income families to protect poorer applicants from commitments they are unlikely to be able to honour. And thirdly, we need much tighter rules governing all mortgage lenders restricting lending to levels much closer to the 3 ½ price to income safe limit unless there are exceptional circumstances.
TIME TO RE-ASSERT A ROLE FOR THE PUBLIC SECTOR?
Now that the financial markets have imploded and the New Labour/Tory mantra ‘public sector bad, private sector good’ has been well and truly flattened, attitudes have predictably polarised. The nationalisers think they’re back in fashion, and that full-scale nationalisation is the answer (to whatever the question is), as though public ownership by itself alone offered a solution to everything. The private marketers think once the current glitch is over, it’s back to business as usual.
Both these extreme responses are absurd. But the current breakdown does prompt a serious re-think of what new model is now needed – not an ideological ultimatum, but a hard-headed look at where the balance between the public and private sectors should now be drawn so as best to redress the problems that have been exposed.
The problems in banking have been revealed to be a flocking into worthless financial derivatives because they were thought to offer super-profits, a readiness for speculative trading rather than their core function of lending to businesses and individuals, a growing shift to offshore operations to reduce transparency and tax, and a resort to massive bonuses which promoted recklessness rather than innovation and dynamism in banks’ proper functions. They also extensively promoted mortgage lending to a huge number of low-income households who could obviously never afford it – the UK’s very own sub-prime market scandal. There is clearly a very strong case for at least one publicly owned bank as an exemplar to transform the whole ethos of banking practices which have now become seriously corrupted, quite likely beyond the reach even of tighter regulation.
Moreover, when the Government (or at least Mandelson) is thinking of part-privatisation of the Post Office, there is also a strong case for pursuing the opposite course of re-establishing a new Girobank and bolstering the Post Office Card Account within the Royal Mail. The former would provide universal access to banking which the private sector never will. Britain has only 180 bank branches per million inhabitants, against triple that number in France, Germany and Italy and five times that number in Spain. The latter also deals with another private sector failing – financial exclusion for over half the population – when POCA provides a basic bank account for 5 million people while the private banks offer less than 2 million.
The fashion for outsourcing transport contracts to the private sector also needs to be reviewed. Several rail accidents (including the Clapham train disaster) have been traced back to faulty work passed down the line to over-stressed contractors forced to work too long hours or to loss of managerial control through myriad sub-contracting. Notorious losses of highly sensitive IT data (including 2 CDs containing a mass of personalised data about half the entire population) as well as large passport batches have been due to private couriers. Bringing this work back under more secure public sector procedures could save substantial costs as well as political embarrassment.
In pharmaceuticals the need for a public sector comparator becomes clearer all the time. The recent dispute about whether someone who buys very expensive drugs privately should then have to pay for the rest of their NHS treatment misses the key point, as the chairman of NICE pointed out, that many drugs are far too costly. Regulation will never get close enough to the inner works of pharmaceutical companies to be an effective constraint on excess profiteering. One or two publicly owned drugs companies could make huge savings for the NHS.
In housing the Government’s prejudice against Council housing (even in Thatcher’s last year 13,000 Council houses were built, compared to only 100 a couple of years ago) has crucified hundreds of thousands on ballooning Council waiting lists which have now reached 1.7 million in addition to nearly 100,000 homeless. The private sector, whether through home ownership or renting, will never get anywhere near providing decent housing for the poorest quarter of the population. Why resist the obvious solution of good-quality publicly provided social housing, not least when this offers the best counter-cyclical measure in an economic downturn?
Ideological fixation in favour of throwing private markets at every problem must now give way to more common-sense solutions.
Cutting interest rates rapidly towards US levels of around 2% seems at last to be getting through to the MPC (but was it really such a good idea to give them this power in the first place when they invariably display the bankers’ prejudice to countering inflation irrespective of the real economy?). Yet there is still little sign of take-up of the other main weapon to tackle the recession – major public works building programmes, especially housing.
Repossessions are expected by the Council of Mortgage Lenders to reach 45,000 this year and to exceed next year the number reached at the nadir of the 1991 recession. In my constituency alone (Oldham) the number of repossession orders registered in court had already soared to 1340 in 2007, a very worrying 50% increase over the level reached at the pit of the recession in 1991, and must be considerably higher now. The only way to keep people in their own homes and to prevent a veritable national blizzard of repossessions by this time next year is to ensure that any persons threatened with eviction from their home can either convert their repayment mortgage to an interest-only one (saving nearly two-thirds of the cost) until such time as they can switch back to covering the repayment costs, or to allow them to transfer to tenancy status with a local authority or housing association until again they are economically able to resume purchase of their home. The Government has talked about this, but it needs to do it – urgently. I have written to Yvette Cooper, Chief Secretary, and to DCLG to ask for an early statement to be made of their precise plans and the timescale for implementing them.
The other desperate need is a massive crash programme for building social housing. The failure to do this is one of the greatest scandals of the last decade. In Thatcher’s last year 1990-1there were still 13,000 Council homes a year being built in England; by 2004-5 it was just 100 (according to DCLG statistics). The consequences of this New Labour prejudice against building Council houses (because Council tenants were being pressured to become owner-occupiers instead – a home-grown UK sub-prime market in the making) have been dire. In the North-west region housing waiting lists have risen 75% in the last 5 years, and house prices rose no less than 81% over the same short period – far more even than the national average rise of 58%. As a result, homes in the North-west cam to cost over 8.5 times average incomes.
There are now 1.7 million households on Council waiting lists, plus a further 80,000 in temporary accommodation and categorised as homeless. Again, in my constituency alone there are 12,000 households desperate to get a Council flat or house, but none is being built, and even the existing stock continues to be whittled away by the Right to Buy. This year the Government has announced it aims to raise its social house-buildingnationally to 2,500 units. This is certainly better than recent years, but it scarcely scratches the surface of the enormity of unmet need. What is needed is an annual target of at least 50,000 social houses a year, to be reached within 3-4 years. If £100bn can be found by the State to save some of the banks, £10bn can certainly be found by the State to tackle the social evil of homelessness and seriously poor and inadequate housing, especially since its counter-cyclical potential is so powerful. The Government’s fate at the next election may well turn on how forcefully and extensively they deal with this disfigurement of our society.
WHO DECIDES WHAT NEW GLOBAL ECONOMY?
If the new Bretton Woods conference is held in Washington next month or December to establish the new global economic and financial architecture, who should attend and what should be the items on the agenda?
If it is to win global acceptance and not be seen as a stitch-up by the current (now much humbled) global power-brokers, it is crucial that it represents all the main key economic groupings across the world – not just the US, EU, Japan, China, India and Russia, but representatives speaking for other key blocs including Latin America (Brazil), Africa (South Africa), and southern Asia. The WTO talks collapsed because developing countries refused to accept a trading system they perceived (rightly) as strongly tilted in favour of the Western industrial powers. A new global agreement has to be negotiated; it cannot be imposed by a tiny global elite like the war victors in 1944.
Its agenda obviously has to be focused on the broken system of financial markets, but must also go much wider. On markets it must establish a framework of international supervision which effectively regulates credit derivatives, securitisation, capital adequacy ratios, credit creation, credit rating agencies, offshore operations, transparency in accountancy and auditing, and risk management by international authorities with adequate powers to intervene decisively wherever necessary. In effect, the conference has to determine new parameters for the operation of economic and financial markets – neither so lightly regulated that they self-destruct as in the last year, nor so tightly regulated that the dynamism and innovativeness of markets is unduly restricted.
But the conference reach must go much wider than banking operations. It must reflect the multi-polarity that has now superseded the hegemonic power of the US since 1945 and particularly since 1989. The IMF, WTO and the World Bank must be replaced by different institutions that reflect the new realities, not a capitalism engineered to ensure the continued dominance of the richest nations that ran it.
Two other fundamental changes are necessary before a new global settlement can be reached. One is new trading rules that replace the so-called Washington Consensus (in fact unilaterally imposed) that lays down such a lopsidedly unfair system in favour of Western multinationals against developing economies with infant industries. IMF structural adjustment plans for so many struggling Third World economies imposed deregulation, privatisation and unequal tariffs, while structural adjustment plans for the West turn out to mean re-regulation, nationalisation and vast largesse. A re-ordered trading system must end the inbuilt subordination of poor commodity producers to rich industrial countries and close the ballooning global inequality that unfettered markets have generated in the last three decades.
The other fundamental change required is to design a new world order that is sustainable within the limits of the planetary eco-system. The combination of diminishing resource availability (most notably oil and water), unsupportable population growth and slowly intensifying climate change urgently demand an economic dynamic that contains, not exacerbates, these pressures. Even without the financial collapse, the days of no-holds-barred competitiveness had already run up against the impassable barrier of mounting environmental and climactic degradation. This world conference is a once-in-a-lifetime opportunity to shift the economic drive towards a more co-operative globalisation, particularly in developing a renewables-driven economy in place of energy wars over diminishing fossil fuels availability.
(This comment first appeared in the Guardian on Commentisfree on 21 (October).
ARE WE REALLY SERIOUS ABOUT CLIMATE CHANGE?
Bully for Ed Miliband, pledging the Government to an 80% cut in UK carbon emissions by 2050 compared with 1990. The previous target, set in 2000, had been a 60% cut. All those who care about fighting climate change (which ought to be everybody) should be pleased. The only question is: how credible is it?
Britain’s CO2 net emissions were 161.5 million tonnes in 1990. A 60% reduction therefore requires that UK carbon emissions should reduce by 96.9 million tonnes by 2050, and that implies that emissions should reduce on average by about 1.62 million tonnes a year. On that basis carbon emissions should have reduced by some 16.2 million tonnes over the last decade since 1997. They haven’t. They’ve gone up.
If we have failed so dramatically, so far, with the 60% reduction target, why should we be any more likely to hit an 80% reduction target? The real test is not turning out ever more radical targets, but putting in place effective mechanisms which will make certain we reach more modest targets, and then even tougher mechanisms to make certain we reach tougher targets. Britain’s problem, which we share with many other countries, is that we have done the opposite.
We are actually putting in place mechanisms which will ensure we do not reach even the modest targets, let alone the more stringent ones actually needed. The Government has committed itself to trebling airport capacity in the UK by 2030 which, if it happens, will neutralise their entire carbon-cutting programme in every other sector. The Government, or at least DBERR, is committed to building the first coal-fired power station in this country for decades, at Kingsnorth in Kent, even though coal is the most polluting fuel of all and CCS to filter out the pollution is nowhere in sight anywhere in the world.
Gordon Brown is determined to go ahead with a new round of nuclear build which will crowd out the desperately needed promotion of renewables in this country. We have more wind and wave and tidal power capacity in the UK than anywhere else in Europe, yet we currently generate just 4% of our electricity from renewables compared with 10-25% in France, Germany, Italy and Spain, and 35-50% in Scandinavia. Yet the Government is actually this year trying to whittle down the EU’s renewables target for the UK.
The Government is still opposed to bringing the airline industry into the Kyoto Protocol (or even into the current Climate Change Bill), and has no effective programme for promoting carbon-neutral cars. Industry is still not required to report annually sector by sector on its emissions, to give transparency in reducing them year by year. Household carbon allowances have been mooted, but nothing done except talk about them. And the Government is still doing all it can to extend the fossil fuel era, as most dramatically illustrated by the UK announcement that it is annexing one-third of a million square miles of the sea-bed off Antarctica because it may hold repositories of oil and gas.
An 80% reduction target by 2050 is great. But don’t expect it to be greeted with other than a hollow laugh so long as nearly all the Government’s other policies are pointed in the exact opposite direction.
This article first appeared in the Guardian on Commentisfree on 17 October 2008.
The Brown package is not enough. After initial turn-ups in stockmarket indices in response to the plan, skittish markets have renewed their downward plunge. Recapitalisation, extended liquidity and lending guarantees were clearly needed, but they are not sufficient. The central problem remains, so far unaddressed, that the scale of banking (and governmental) exposure to the unimaginably colossal liabilities buried deep within the financial markets is still acting as an insuperable barrier to any permanent return of confidence.
The origin of the problem lies in the pyramid of creative financial products designed to massively enhance returns and the speed of their being realised. Over the last decade the use of complex credit derivatives – structured investment vehicles and collateralised debt obligations – has grown exponentially both because of its enormous profitability and because risk could be passed on by securitising the assets, i.e.trading them in arcane bundles which mixed them up with income flows from other wholly different sources. Because these bundles were clearly risky, the markets then devised another product to protect unwary buyers – credit default swaps. Then another layer of uncertainty was placed on top because these credit default contracts were also tradeable. This then attracted frenetic speculation in these contracts by hedge funds ready to accept much bigger risks in the hope of exceptional gains.
All this new-fangled machination has now produced two very big dangers. One is that this multi-layering of risk has enormously expanded the instability inherent in the markets. The other is the sheer size of the pyramid created. Securitised assets have exploded from a tiny base a decade ago to some $10 trillions today, while the market in credit default swaps now stands at about $23 trillions and in credit derivatives as a whole at around $55 trillions. The scale of the latter market amounts to more than double the combined GDP of the three largest economies in the world – the US, Japan, and the EU.
The question then arises: are the write-offs from these near-worthless assets so gigantic that not even Governments will be able to stem the tide of collapse? The evidence is already beginning to look worrying. The Icelandic State cannot honour the obligations of the Icelandic banks which made loans more than three times the value of the country’s GDP. Two British banks, Barclays and RBS, each hold $ 2.4 trillions of credit default swaps, which together equals nearly twice British GDP. The collapse of Lehman Brother has left $440 bn of credit default swaps unhonoured, and who will pick up that tab?
The new Bretton Woods conference, called for December, need to make the global regulation of the credit derivative markets its first priority. New rules to govern their role and application tightly, where they are not outright banned, are desperately needed. But even before then (and two months in today’s unending hurricane is a very long time), if the international collapse continues to ricochet round the world, British GDP may not be sufficient to stave off the run on capital flowing out of the City. In that case, there may be no alternative to full nationalisation of the banks combined with a return to capital and exchange controls.
As the smell of fear ebbs, will anything actually be done about the colossal bonuses that precipitated the recklessness and then the crash? You might think so from Gordon Brown’s proclaiming on GMTV a week ago: “where there is excessive and irresponsible risk-taking, that has got to be punished”. Indeed, the banks that accept chunks of the Government’s £50bn recapitalisation funding have been told there will be no bonuses this year and three bank bosses – Goodwin and McKillop of RBS and Hornby of HBOS – have been forced to resign.
Is that as far as it goes? What about all the other captains of finance who had no idea what was going on in the engine room below (as the former chairman of Barclays frankly admitted on the Today programme a couple of days ago) when arcane and incomprehensible derivatives were being cooked up, mortgage-based assets were being securitised in their billions, and speculative trading was rife? In any other area they would be out on their ear, or worse – in court on charges of extreme negligence, gross incompetence, malfeasance, or even perhaps corruption. So what will Gordon Brown do about the City fraternity he courted so cravenly for so long? Not much, if anything, I suspect, once the smoke clears- not surprisingly perhaps when he presided for a decade over this free-wheeling City capitalism, indeed vigorously promoted it, without so much as a quibble.
So what ought the Government to do? City bonuses for several years totalled some £13bn annually, and even in the year when the financial collapse began they still reached £8bn, on top of basic pay of up to £ 1/2 million a head. Last year some 4,000 City managers and traders got bonuses of over £1million each. Such largesse cannot be justified on the grounds that the profits were colossal too. What it shows rather is that if the City bubble had been allowed to inflate to the point where it could pay such stratospheric salaries, there must be something dreadfully wrong with the financial system itself when it had lost all touch with a reality that paid hard-working people in the real economy just £24,000 a year on average.
So what is being done to reform it? The FSA, asleep on the job when the financial crash began, has been tasked to examine how bonuses can reward innovation but discourage reckless risk-taking. Don’t hold your breath for that. Either bonuses should be abolished (on grounds that high pay should be enough in its own right) or at least capped at a modest level, but don’t expect the FSA to contemplate anything radical. Their latest proposal, to demand higher capital ratios if top executives are granted excessive pay, is hardly likely to cause much fluttering in the dovecotes.
Several reforms are needed here. The FSA should be thoroughly revamped, both in its remit and composition. Its members, usually chosen by the Treasury, should be ratified, not by Ministers, but by the Treasury Committee and it should be accountable to Parliament. It should stringently regulate the use of derivatives, securitisation and speculative trading. Exorbitant bonuses and remuneration packages, if permitted at all beyond modest limits, should require FSA approval in accordance with a framework agreed with Parliament. And such requirements should of course apply, not only to banks obliged to seek Government subsidy, but across the whole financial sector in order to prevent any further collapses in future due to recklessness driven by pay excesses.
WHAT EXACTLY IS BANK NATIONALISATION FOR?
In today’s statement the Government has taken majority control of RBS and a commanding stake in HBOS, in addition to prior public ownership of Northern Rock and Bradford & Bingley. It is also apparent that if the Brown-Darling package doesn’t succeed in stopping the rot, there is really no alternative left but full nationalisation of the banks. But to what end?
Alistair Darling has made it clear that the purpose of nationalisation, whether partial or full, is simply to stabilise them before selling them back to the private sector. That, without strings, is a wholly unjustified use of £50bn of taxpayers’ money. Admittedly, Government has tagged on certain conditions to the use of this money. There will be no bonuses this year – hardly a great penalty in current circumstances when board salaried comfortably exceed £500,000 per director. Bonuses in future years will be in the form of shares, but given current depressed prices that could still offer eye-watering gains.
There are two scenarios here. One, demanded by the City, is that once the £50bn + has been used to prop up the banks and they get through the crisis, things revert largely to normal and business re-starts where it left off. The other is that the grotesque failures of judgement, integrity and competence must be acknowledged and the lessons incorporated in a new national and international finance order. Alistair Darling in Parliament today recognised the need for reform, but only vaguely and at some indeterminate point in future. Tomorrow’s Banking Bill, which offered a perfect opportunity for setting down the first requirements for reform, is in fact a technocrat’s charter – a compendium of simplified procedures for solvency and takeover, but with no vision about the fundamentals whatsoever.
This is wholly unacceptable. The time to insist on reform is when institutions come begging for money. That’s why the purpose of taking public control of the banks should be, not merely stabilisation followed by re-privatisation, but rather to tackle the fundamental causes of the present turmoil by changing the banking system’s approach to derivatives and securitisation, offshore operations, use of hedge funds, and speculative trading, let alone the obscure reporting of corporate risk and often dodgy auditing. If the taxpayers’ £50bn were tied to evidence that these malign banking practices were being discarded, with Government directors tasked to ensure these conditions were complied with, the first steps would have been taken to create a new financial order. In the absence of such conditions, we face another bankers’ ramp, grace of the taxpayers’ largesse.
WHO WANTS PRIVATISATION IF THIS IS WHERE IT LEADS?
The Government announcement that there are now 3 ½ million households in fuel poverty, and rising, means that the demand for a windfall tax on egregious oil and gas profiteering – with likely Shall profits this year of £16bn, BP £13bn and Centrica (which owns British Gas) £1bn after raising gas prices by 35% – will not go away. But the whole wretched saga of Government appeasement of the oil lobby raises an even starker issue.
First the Government backed off a windfall tax when the companies kicked up. Then the Government backed off the leaked promise of £150 to protect all families on child benefit from rising energy bills. Now the energy companies are even threatening an investment strike if they’re forced to make a contribution to cutting fuel poverty or improving energy efficiency. So what exactly was the privatisation of energy for – to enable the companies to hold the nation to ransom and exploit the market with impunity while the Government stands by helpless? Was it not supposed to benefit the consumer?
The Government has three options. One is a windfall tax (carried in the vote at the Manchester conference) which has in fact been used in the past by Tory Governments as well as Labour to drain off very large unearned profits. A second option is to impose a levy on excess oil and gas profits while the energy price spike remains high in order to establish a legacy fund (before the oil runs out in 40 or so years’ time) to invest in a sustainable energy infrastructure to succeed fossil fuels. The third option is for the Government to charge for permits under the EU emissions trading scheme. Ofgem recently warned that UK generators could make £9bn windfall profits from being allowed such permits free while at the same time being able to pass on nearly the full cost of carbon to their customers.
None of these options however is a starter because New Labour puts more store by Big Business and the City of London than by 3 ½ million families now being squeezed into fuel poverty, a number growing by a further 0.4 million with every 10% increase in energy prices. The moral in all this is that once Government surrenders to the market in a privatised economy, the sharing of the spoils is drastically unequal and social justice evaporates. The case for looking again to a public sector role in the energy sector could hardly be clearer.
Nor is this the only area where privatisation has delivered perverse results. The modernisation of the London tube infrastructure, which Gordon Brown as Chancellor insisted should be funded via privatisation rather than through the issue of bonds within a publicly owned enterprise, led to bankruptcy and the taxpayer having to pick up a £2bn bill. It also led to the five big contractors who held all the equity in the privatised company carving up all the contracts between themselves without any competitive tender, and then after making thumping losses walking away with impunity.
The building societies were de-mutualised and turned into private sector banks to increase their profits by taking greater risks within the market, which led directly to Northern Rock and now Bradford and Bingley. Hospital cleaning services were contracted out to private firms to cut costs, but then poorer standards almost certainly contributed to the MRSA and c.difficile epidemics. Transport functions within the public service have been outsourced to private firms, again supposedly to save costs, but then private contractors lost personal details of 25 million child benefit claimants, personal records of recruits to the armed forces, records of 3 million learner drivers, and 200,000 NHS records lost by 9 privatised Trusts.
Other privatisations have not exactly turned out a success. BAA, after the terminal 5 debacle, the third runway scam and frequent chaos at Heathrow through giving preference to profitable shopping malls over speedier security clearance for passengers, is now having to be broken up. Railtrack collapsed into notorious administration, and service standards under privatisation have never regained those of British Rail. In education, the outsourcing of test results for 11-14 year olds to the American private company ETS produced a comprehensive catalogue of errors. In health, the private sector treatment centres set up to reduce waiting lists ended up being paid in full even if no operations were performed.
It is widely believed that the private sector is more efficient than the public, and that markets and the profit motive will secure the best value for money. The facts suggest otherwise. The OFT report in April found that 112 building firms had rigged bids for multi-hundred million public contracts, inflating estimates and submitting false bids at unrealistic prices to give a pretence of choice. Balfour Beatty, for example, recently increased its bill for constructing the 2012 aquatic centre to £ ¼ bn, triple the estimate in London’s Olympic bid.
The record of privatisation and all its consequences, which Thatcher initiated and New Labour continued, needs to be officially reviewed, by Parliament if the Government declines. It isn’t just the current ignominy of a Government helpless in curbing the excessive profiteering of the oil and gas companies to reduce fuel poverty; it’s the whole record of incompetence, inefficiency and occasional corruption which has grossly short-changed the taxpayer and continues to do so.
This article first appeared in Tribune on 10 October 2008.
THE BROWN-DARLING PLAN: WHO’S GOING TO PAY FOR IT?
No wonder the City and the banking fraternity are purring over the Darling financial package. It must be the biggest bail-out without strings in modern history. But it is going to skin the taxpayer for a decade or more and stymie expenditure to counter the recession on anything like the scale required.
Where else would £400-500bn of public money be ploughed in to unfreeze a set of paralysed institutions without the Government taking any controlling interest? Even the £50bn recapitalisation is in the form of preference shares which involve no voting rights. A sum equal to about a third of Britain’s entire GDP has been poured into the banking sector unconditionally. Incentives have been given to the banks to participate, but with no enforceability to secure needed outcomes. It shows the Government is still far too much in hock to the financial sector even though they are the miscreants who have brought the country to this impasse.
Again, in any other area of public life would vast sums of public assistance be shelled out to salvage failing organisations while still retaining the bosses who brought about the catastrophe in the first place? Even private US banks booted out their chief executives when their share prices nose-dived as a result of gross mismanagement, notably over packing their asset base with toxic derivatives. Here however the perpetrators like RBS boss, Fred Goodwin, sail on with impunity, seemingly accountable to no-one, and now adding insult to injury eligible for huge dollops of public largesse while retaining their position intact. The great weakness of the Brown-Darling package is that the sinners go unpunished while the toxic loans they engineered are written off by taxpayers’ money.
But the really big concern about the Darling plan is that servicing and paying off £500bn borrowings will pre-empt the public accounts for years if not decades to come and will massively inhibit the handling of the real threat that faces us – a global depression. That can only be countered by much deeper cuts in interest rates than the 0.5% so exaggeratedly welcomed yesterday, plus a massive public works programme (notably 100,000 social houses built per year, not the 2,500 the Government has in mind) and big tax cuts for average and low-paid families. What we absolutely should not get, but probably will, is the opposite – painful public expenditure cuts made inevitable, we shall be told, by the £500bn overhang.
So how should such a real economy stabilisation package be funded? As Gordon Brown has rightly said, exceptional times call for exceptional measures. The scale of tax evasion by the big corporations and the super-rich, now reliably estimated to rob the Treasury of between £75-150bn a year, should be tackled with war-time rigour. The tax havens hiding billions offshore should be opened up by law and the vast wealth illegally accumulated there over decades should be repatriated to replenish Treasury coffers. And in an unprecedented crisis like this a significant tax surcharge needs to be levied on the broadest shoulders – the hedge funds and private equity operators, the higher rate taxpayers (particularly the 1% richest), and the biggest businesses. It will hurt, but not doing so will hurt much more.
This article first appeared on Commentisfree in the Guardian on 11 October 2008.
Another weekend, another crop of financial crises. The weakness of the EU is starkly exposed when, 24 hours after EU leaders sought a collective response to the gathering crisis, Germany does the reverse and unilaterally offers a blanket guarantee to all savers – exactly what Ireland and Greece have already done and were roundly condemned for it at the Euro summit by Germany as well as others.
Should Britain follow suit? The idea gaining ground in the Treasury is that, instead, the Government should preemptively rather than reactively seek to recapitalise the banks by buying into a significant stake and thus hopefully forestall collapse.
That however raises several difficult questions. How many banks is it envisaged might be involved? What level of stake is being thought about? And, bearing in mind the deficit in the public accounts already likely to rise to some £70bn, what ball-park level of expenditure is being planned?
In addition, what early international regulatory measure might the Chancellor be looking to to help free up the international credit markets which is where the problem really lies?
Deep Packet Inspection may not mean much, but it ought to bring to a head the simmering tension over privacy between personal liberties and fighting terrorism which the Government has been dragging far too far in the direction of State control.
Deep Packet Inspection refers to equipment which the Home Office is planning to embed with internet and mobile phone providers (such as BT and Vodafone) so as to monitor and store the calls and emails of everyone in Britain all the time. This is a staggering project in every sense – cost, complexity, and unprecedented intrusiveness in ordinary people’s lives and their most intimate communications.
It goes even further than the Government’s other massive programmes of prying on citizens via identity cards, car number plate recognition, and increasingly universal CCTV. The scope of the new plan is mind-numbing. Last year there were 57bn text messages sent, mobile calls made totalling 99bn, and a trillion emails sent.
The ostensible purpose of this ultimate Big Brother surveillance programme is to fight crime and terrorism which it is said are aimed at destroying the values of our society. But there comes a point when the totalitarian methods deployed to root out crime and terrorism can insidiously undermine the fundamental values and principles of British society even more than the evil they seek to eradicate. With this latest Orwellian monstrosity, there can be no doubt we are well past that point.
Interception of calls and emails is already occurring on a far greater scale than is generally understood. Very few people realise that there are over 650 bodies which can already legally have their communications intercepted by the authorities, or that last year this was exercised in over half a million cases. I have put down PQs asking, for each of the last 10 years, how many of these calculated intercepts actually yielded information material to trapping terrorists and criminals. What is now proposed is a totally indiscriminate monitoring of the unimaginably vast database of all calls and emails by everyone everywhere all the time in this country, and the hit rate for gathering relevant information must decline to utterly infinitesimal proportions.
There are several reasons for stopping this latest venture in its tracks. The expected cost is £12bn, which on past experience of vast Government IT projects is all too likely to escalate dramatically. On the basis of the same evidence it is all too likely not to work. Nor, from several recent notorious episodes, can the authorities be trusted to keep all this personal data secure from being lost, stolen or even corruptly sold on. Nor again can we be sure that official snooping on this scale will not be used for quite other purposes than fighting crime and terrorism – like spying on companies or political opponents, or fishing expeditions to see what is turned up. It would transform Britain from a (relatively) free society into a Stasi-penetrated nightmare.
Today’s emergency summit of EU leaders at the Elysee Palace in Paris is more important than the normal photocalls might suggest. Ireland’s decision – now largely followed by Greece – to put a State guarantee under not only retail depositors, but also more significantly international investors’ debt as well as wholesale deposits and inter-bank loans poses a huge challenge not only to other EU countries, but also to regulators worldwide.
In today’s market conditions international funds will rapidly migrate to wherever their money will be secure. If then other EU countries follow the Irish lead because otherwise their own banks would be disadvantaged, the costs to national treasuries (and their taxpayers) could be astronomical. Britain’s GDP amounts to £1.5 trillion, but the cost of underwriting every bank in Britain could be up to £9 trillions. That could put even Paulson’s $700bn US bail-out in the shade.
If on the other hand EU countries do not go down the Irish route, their financial institutions suffer a competitive disadvantage compared to the Irish (and Greeks) which could be seriously damaging. Moreover, it drives a coach and horses through the whole idea of the EU internal market as a level playing field, as the EU Commissioner Nellie Kroes plaintively acknowledged yesterday.
The situation is worryingly reminiscent of the self-defeating competitive devaluations of the 1930s. Faced with a desperate need to escape the depression dragging everyone down, countries opted to lower their currencies to seize a larger share of whatever international economic activity remained. But when other countries followed suit to protect themselves, any unilateral benefit was quickly eroded and all finished at relatively much the same position, but at one or two notches lower as the economy contracted.
How to avert a similar disaster this time round – not of depression, but rather of even sovereign countries facing potential bankruptcy as the guarantees underwritten escalate? Doubts have already arisen whether the Irish Government can in fact meet all the guarantees it has now offered.
Maybe the solution is not to try to underpin all banks irrespective of their capitalisation, but only banks whose funding composition makes them good risks. ‘Bad’ banks, i.e. those over-dependent on toxic securitised derivatives, should perhaps then be bundled together and, whilst protecting their despositors’ funds, their toxic assets would be sold off at the best prices that could be secured in the market. The Swedish Government pioneered a similar scheme in the early 1990s, and with considerable success. It would preserve a measure of moral hazard as a future warning for the banks, whilst at the same time avoiding the risks and cost of an indiscriminate all-or-nothing bail-out.
Any hope the EU might today arrive at such an ingenious resolution of the current crisis? I wouldn’t hold your breath.