2009 – the UK’s economic imbalance

Short Paper for NIC-ICTU

DISCUSSION on ECONOMIC RESPONSE, 4th March 2009

 

  1. INTRODUCTION

This short paper is produced as a contribution to the special NIC-ICTU meeting to consider a trade union response to current economic circumstances in Northern Ireland.  The principal concerns are:

  • the imbalanced nature of the UK economy in favour of financial services, the City of London and the South East as compared with the regional former manufacturing strongholds, including Northern Ireland.
  • an adherence to a neo-liberal or “Washington Consensus” worldview has disabled the current UK government from responding appropriately to changed circumstances.
  • the laissez faire approach to the economy, banking and tax policy which leaves low and middle income families (and PAYE workers in particular) shouldering a disproportionate burden.

 

  1. SUMMARY

The trade union movement should focus on several general points, namely:

  • a ‘Keynesian’ financial stimulus, through borrowing to shift the economy towards a productive, manufacturing focus, to include a “winning sectors” approach and a new framework for company law
  • a new financial architecture with a focus on public utility banking, a re-mutualisation of mortgage provision and a revitalisation of the Post Office as a Peoples’ Bank and of Credit Unions as instruments for local economic development
  • a relentless focus on tax fairness
  • an equally robust focus on wage inequality, the promotion of “wage compression” as a means of “sharing the pain” and a zero tolerance approach to spiralling Executive pay.
  • new company law legislation for a different, more socialised, conception of the company
  • A new approach to saving and to pensions

 

In addition, the union movement should promote the unabashed use of the state apparatus at Northern Ireland level to play its role in the stimulus package

 

  1. THE UK ECONOMY

In today’s UK economy, the United Kingdom as a whole – in the words of many a Chief Constable – lives a lifestyle “well beyond its visible means”. The UK was, allegedly, the 4th largest economy in the world, yet it is remarkably unproductive.  The UK makes very little, manufactures very little; grows very little, and extracts or mines very little. In 2006, there was a £60 billion deficit in visible trade in goods (ie the stuff we make). Until the “credit crunch” this deficit was, apparently, to made up to a degree from “invisibles” – the result of a vibrant financial services sector!  The health of the City of London is of paramount importance to the UK Governments – a financial centre that even the International Monetary Fund has described as a tax haven.  This is all well described in Larry Elliott and Dan Atkinson’s book, Fantasy Island (1) which should be recommended reading for all in our movement.

The UK economy is not remotely productive, and Northern Ireland is the least productive part of it!

 

By way of contrast, it is worth saying that the inflexible, unproductive, ossified economies of “old Europe” were, until 2008, bringing in trade surpluses.  The German economy, which Gordon Brown never tires of heaping scorn upon, had the biggest trade surplus in the world in 2007. Japan’s 2007 trade surplus was over £50bn.  France, the Scandinavian countries, and even Italy returned trade surpluses. They all lived within their means or better.

The crisis, in short, has its nexus in the Anglo American “slash ‘n burn” model of capitalism and is not global in conception.

 

The leverage and scope for Peter Robinson (even were he minded to do so) to effect movement away from this failed UK economic model is limited.

 

  1. THE NORTHERN IRELAND EXECUTIVE STRATEGY:

The Northern Ireland Executive Budget, Investment Strategy and Programme for Government (PfG) for 2008-11 was drafted within a “mainstream” free market, neo-liberal orthodoxy and was welcomed by the CBI, the IoD, the FSB and by all and sundry in the media. Its main features included:

  • Compounded, year on year, efficiency savings of 3%
  • The sale of significant public assets (now under severe pressure following the collapse of Workforce 2010)
  • Hitching a vast programme of capital spending of between £16-£18 billion, to an aggressive programme of privatisation and marketisation, based on the now discredited private finance or PPP procurement processes
  • An acceptance of the ideological dogma that the public sector “crowds out” the private sector
  • Balkanization of the public sector by way of 23 Public Service Agreements (PSAs)

 

The difficulty for Northern Ireland in proposing this budget to is that our region forms part of a wider UK economy which relied heavily on the performance of the City of London, on housing speculation, on substantial government borrowing and spending, on vacuous consumerism and vast individual consumer borrowing, on the availability of both easy, regulation-lite credit and on the availability of low cost consumer goods from around the world.

The future of all of the strands of this UK economy, above, are now under serious question.

 

  1. ICTU 10 POINT PLAN

In these new fluid circumstances, opportunities present for trade unionism. The ICTU has issued a 10 point plan in the Republic of Ireland

  • Protecting Jobs & Tackling Unemployment
  • The Banking Crisis and the Public Interest
  • Competitiveness
  • Pay Agreement
  • Fairness & Taxation
  • Restoring consumer confidence
  • The Public Sector Pension levy
  • The Private sector pension crisis
  • Employment Rights
  • National Recovery Bond

 

  1. MAIN THEMES TO TASKE FOR A REMODELLED ECONOMY

In Northern Ireland, within the context of overall UK economy, we should borrow on this and consider an approach based on the following

 

6.1 Shift to the Productive Economy: Moving from an economy based on the excesses of City of London, financial services, the service economy general, large scale public and individual debt and wealth creation based on often vacuous and frivolous consumer consumption will not be easy.  However, an assumption in favour of a productive economy and manufacturing is the first step.

Barack Obama’s US stimulus package concentrates on the green economy, developing the railways and national infrastructure, developing the national broadband grid/superhighway.  In the short term, it concentrates on labour intensive, job creation programmes which, at once, address employment creation and future energy needs.

We should use this crisis to promote a similar Keynesian intervention.

 

6.2  Finance and Banking: A serious trade union response will grapple with the role of the Banking system within the UK economy. The basic functions of banking are quite simple – to provide a place where people can keep their savings safe and to provide funds for those who want to borrow to invest.

The Trade Union movement should consider promoting the following:

  • Fast tracking Bank Nationalisation: tax payers bail outs of British banks have neither achieved the aim of restoring credit flows, nor corrected bad corporate behaviour. The UK Government lent some £500 billion to Banks without extracting any leverage or control. Massive unconditional taxpayers subsidies have simply been used by Banks to improve their bottom lines – have failed to stimulate lending and failed to suppress the payment of ludicrous bonuses. Taxpayers should expect that “he who pays the piper, calls the tune”. There is now no serious alternative to renationalisation of large segments of the banking system.
  • Separating out, by law, the Public Utility Banking function from the high risk, “casino” style, function of investment banking. This measure was, wisely, implemented in the wake of the Great Depression in the US and was only lifted in the 1990’s after Wall Street argued a need to compete with the less regulated City of London (itself de-regulated under Thatcherite direction)
  • Promote the remutualisation of mortgage lenders and the promotion of mutual finance services through Credit Unions and the Post Office. The Post Office could find a renewed vigour as a trusted “Peoples” Bank (a proposal set out in more detail by the Compass Group), with the Credit Unions extending their role in supporting local economic development.
  • Dismantling the tripartite supervisory relation put in place under New Labour (FSA, Bank of England and the Monetary Policy Committee) and restoring to the state bank the supervisory authority for all banks.

In addition, banks have played a central role in the vast tax evasion slowly coming to light by super wealthy individuals and corporate business. A new banking framework must play an active role in rooting out tax larceny/havens.

 

6.3 Tax Fairness: The trade union movement is best placed to argue cogently in favour of tax fairness. It is clear that there has been tax larceny on a grand and organised scale, encouraged by the “regulation lite” outlook of the current UK Government.  The staggering recent report by tax specialist Richard Murphy (2) shows that the UK loses some £25-33 billions in tax avoidance by large corporate businesses and super wealthy individuals. This may be a considerable underestimate. In addition, a further £30billion pa is expended on providing tax relief on pensions for top tax band earners! Over one third of the UKs largest 700 companies pay no tax at all. A further third pay very little. The relevance of this to Northern Ireland is significant. Based on the standard anticipated share, under Barnett, this could add between £0.71 billion and £0.94 billion into Northern Ireland’s coffers.  Neither Peter Robinson nor Martin McGuinness, the DUP nor Sinn Fein, have had anything at all to say about this staggering loss of income to the local Treasury!

Why the silence?

 

By way of example, one of the largest companies present in Northern Ireland is Tesco’s.  We spend an estimated £1 of every £3 in groceries at Tesco’s and about £1 in every £8 of total income.  Yet Tesco’s are fit to boast that it their duty to their shareholders to bilk the Treasury to the tune of over £1 billion per annum through a network of complex financial vehicles in offshore havens! (3)

 

A gigantic fraud has been committed by the financial elite, with the tax burden shifted to PAYE taxpayers. The City of London was itself described by none other than the International Monetary Fund as a “tax haven”. In the Bill presented to the US Congress in 2008, Barack Obama identified 34 tax havens for the wealthy.  Nine of these are under British control (Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibralter, Guernsey/Sark/Alderney, the Isle of Man, Jersey and the Turks and Caicos Islands).  A further 15 are former British colonies where British influence remains strong (Antigua, Bahamas, Barbados, Belize, Cook Islands, Cyprus, Dominica, Grenada, Hong Kong, Malta, Naura, St Kitts/Nevis, St Lucia, St Vincent and Singapore).

It is far from the case, as the current UK government proclaims, that the current ‘credit crunch’ is a global problem.  Its effects may be global, but the current crisis is substantially a problem of Anglo American capitalism, with the UK at the nexus of the global tax evasion problem.

The trade union movement should relentlessly make these points.

 

6.4 Company Law: The short term focus of Anglo-American conception of the company – on narrow shareholder gain – now requires active trade union attention.

There is now a need to legislate for a more broadly based, civilised, conception of the company in law. Traditionally, companies were invented by “companions” who banded together to share risk to perform a vital economic or other function from which they would profit. They would petition the state for a licence to practice and accept reciprocal societal obligations in return.

This classic conception of company has been debased by the narrow notion of short term shareholder return, a notion which will consider quicker routes to shareholder return than investing in people to develop a great organisation. Merger and acquisition to extend market share, tying senior management to stock market performance through share options, increased managerial opportunism and the use of performance related pay for middle and junior managers to effect cost minimisation all serve to reinforce the short term view of the company, rather than the need to invest in skills development.

We, as a union movement, need to develop a narrative around what a broadly defined and progressive company, with environmental and societal obligations, should look like.

 

6.5 Executive Pay and Wage Compression: The current crisis offers the trade union movement the opportunity to chime with the public mood and argue for radical and substantive wage compression – to bridge the growing gap between the low paid and ridiculously inflated Executive pay.

Spiralling Executive Pay has been described by the late JK Galbraith as “grand larceny” legitimised by the pretence of oversight by shareholders, head hunting recruiters, executive pay benchmarking and auditor regulation.(4)

It is time for the trade union movement to tackle the pay gap.  We could, for instance:

  • Argue that no public sector post (including within the Banking sector) should be remunerated beyond £100,000 pa
  • Argue, as a general rule, that we adopt the ratio system in place within the Royal Navy that no employee should be paid more than 8 times the rate of the lowest paid employee.

Wage compression is a powerful argument which will sit well with the public and should be made, repeatedly.

 

6.6 Pensions: Finally the trade union movement should argue for ”Fair Shares for Pensioners”. The approach to pensions taken by the late Barbara Castle(5) was a simple and fair one based on:

  1. A proper, uplifted state pension, indexed linked to earnings, as the building block to saving through the working life
  2. A restoration of the State Earnings Related Pension (SERPs) as the basic second tier pension (except where an employee prefers to save through a properly regulated, approved, company pension scheme).

 

The effect of this would be to promote the more ‘conservative’ frugal and sustainable framework for people to be enabled to save responsibly for the future. This would also militate against the frivolous, consumer binging which has been the ‘bedrock’ of the British ‘boom’ under New Labour.

 

  1. NORTHERN IRELAND SPECIFIC MEASURES

The most important, Northern Ireland specific measures should be about the use of the state to protect jobs and embed the focus on the productive and green economies.

 

7.1 Procurement: The government’s large planned capital programme should be fast-tracked – but fast-tracked within the context of a socialised public procurement process.  The Capital programme is vital, immediate and urgent, in order to keep jobs in the construction sector.  The demise of WorkForce 2010 (and by implication, the corporate welfare scheme of PFI/PPP) is welcome. The Trade union movement should press for immediate resolution of the procurement crisis in government (and within the Strategic Investment Board) but implementation of the already agreed, equality proofed Procurement guidance.

 

7.2 Govt Apprenticeships: Given the paucity of an employer base capable of hosting work based apprenticeships, the state apparatus should step in.  Why not Engineering apprenticeships in the Roads Service or Translink/NIR, or forestry/carpentry apprenticeships in the Forestry Service? Why not horticultural apprentices within local government?

 

7.3 Private Sector Apprenticeships: The concentration should be in developing a rigorous, quality, apprenticeship system for only priority sectors with productive or manufacturing functions. Such apprenticeship frameworks should be developed within tripartite structures involving the State, the Employers (perhaps through the relevant Sector Skills Council) and the Employees representatives (Unions).  Moving away from a “voluntaristic” model of apprenticeships which has largely failed to a front loaded, and long term planned and rigorous programme of study and work experience.

All other apprenticeship frameworks, notably those in the services sector, should be scrapped (with each of these sectors relying on the National Vocational Qualification system, employer training and “on the job” training). A high quality apprenticeship programme should also be built-in as an integral part of the £16 billion capital and infrastructure programme.

 

7.4 The Green Economy: Measures should be taken to promote the green economy. The German achievement of vast job creation and investment in low carbon technologies has not been looked at by the NI Executive – but has come within the mainstream of Government thinking in the Republic under the influence of Green Party’s Eamon Ryan.  Fianna Fail were not behind the door in stealing ideas from the German system of Mitbestimmung (co-determination); they won’t be shy to steal German ideas on the green economy either.  And with over 200,000 Euro investment pledged to energy related research over the next 5 years, Ireland – from a low base – could now – under the impetus of the credit crunch – seriously promote a low carbon economy.  It is likely that we’ll see incentives to develop low energy transport; we’ll see energy efficient building regulations; we’ll see a growing commitment to bio-fuels in public transport and we’ll see the promotion of a shift towards energy crops in farming.

All of the above should be considered in Northern Ireland, notwithstanding that even an Environmental Protection Agency has been too much for some.

Given the temperate climate enjoyed by Northern Ireland, we should be a world leader in forestry, carpentry and wood products. A strategic, large scale, shift towards reforestation will have significant short term benefits in terms of intensity of labour – and significant advantages over the long term, not just in “green gain”, but in skills development, and wood related manufactures. Reforestation should be a significant long term theme for the movement.

 

7.5 Political: The union movement needs to hone its argument in respect of those who in the NI Executive who might see public sectors cuts as an appropriate response to the crisis. Our argument should be that local politics should “share the pain” Nothing in the Programme for Government tackles vastly over-bureaucratic governance – the ridiculous spectacle of 11 Departments on top of 108 MLAs double and treble jobbing, state funding of up to a thousand political jobs, many filled by political spouses and relatives.  Although the 26 Councils will reduce to 11, some 460 councillors will be retained – a huge over provision. The OFMDFM has more staff than had Bush’s White House, and 10 times Alex Salmond’s equivalent (and more powerful) office in Scotland!   It should be noted that Peter Robinson and his family have benefited to the tune of close to half a million pounds in 2006-07 from the public purse from tax funded political salaries and allowances in respect of their council, Assembly and Westminster roles.  And the Finance Minister’s family ‘take’ is set to rise in 2007-08.*

(NB  * The breakdown of public funding received by the Robinson family for 2007-08 won’t be known for some time, but the figure will be higher than that for 2006-07.  Mr Robinson is now a Minister (of Finance), with Mrs Robinson holding a remunerated Stormont Committee Chairmanship (of the Health Committee), and with MLA office running costs have increased by around £20,000 per member.  Within their allowances, the Robinsons employ all three of their children, plus a daughter-in-law.)

 

 

Mark Langhammer

Personal capacity

 

 

 

 

 

 

References

(1)  Fantasy Island: Waking up to the incredible economic, political and social illusions of the Blair legacy: Larry Elliott and Dan Atkinson; Constable 2007; www.constablerobinson.com ISBN 978-1-84529-605-6

 

(2) The Mission Billions: The UK Tax Gap, Richard Murphy (Director of Tax Research LLP www.taxresearch.org.uk ) for the Trades Union Council, www.tuc.org.uk 2008, ISBN 978-1-85006-814-3

 

(3) Guardian Finance Section: Scheme to save taxpayers money that became a tax avoidance scheme: Tuesday March 4th 2008

 

(4) JK Galbraith: The Economics of Innocent Fraud, 2004

 

(5) Fair Shares for Pensioners  Our Evidence to the Pensions Review Body: Barbara Castle, Pete Townsend et al 1998

 

 

 

 

 

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