Monday, 6 October 2014

Territorial Politics after the Scottish 'No'

Deborah Mabbett

The Scottish referendum has been and gone, and attention has turned quickly to the prospect of another referendum, on Europe. Surveys suggest that the Scots are more pro-EU than the English, so the ‘no’ vote has increased the chances of staying in, other things being equal. Things do not feel equal at the moment: UKIP seems to have been boosted by the result. There is a difficult time ahead for the two main parties. Defections to UKIP from the Conservatives give the impression that the political right is most vulnerable to resurgent little Englandism, but the revival of territorial politics presents difficulties for Labour too.

One of the strangest parts of the Scottish campaign was the debate over the currency. The nationalists apparently feared the prospect of their own currency. They also feared the euro, and so rushed into the arms of the pound. The travails of the euro area are, we are told, the consequence of the folly of bringing disparate countries into the ambit of a single currency. But if that is the folly of the euro, then it is the folly of the pound too. The single currency is, inevitably, managed primarily with a view to economic stability in the core regions of London and the Southeast. Credit conditions cannot be tailored to regional needs. The policy needed to stimulate the Portuguese or Scottish economy need not be consistent with that needed to rein in a housing bubble emerging in Munich or London. By embracing sterling, the nationalists embraced an economic future dominated by the financial services sector in London and – no doubt this was crucial – its small sibling in Edinburgh.

The sterling area should be more resilient than the euro area, in the face of regional divergences, because of its common fiscal institutions. By contrast with the euro area, these mean that there are substantial net transfers between regions of the UK in response to shifting demographics and variable economic fortunes. But this fiscal mechanism is being weakened, while the government in London is declaring the success of its strategy of complete reliance on monetary policy to produce an economic recovery. The Bank of England has managed to talk down the house price boom that rolled through London in the early summer, but it is apparent that the Southeast will recover more quickly on the back of cheap money than the rest of the country. Access to lending for small businesses restricted to local sources of funds (specifically, local branches of banks) remains poor, even while liquidity swills around the City. One explanation is that banks’ assessment of the safety of a loan depends heavily on the collateral offered. Borrowers in the parts of the country where property values are high have more collateral to offer and are therefore less constrained. Even if this collateral is a bit bubbly, it supports lending and promotes growth.

While Edinburgh may thrive on the back of London’s recovery, other parts of the country languish. This United Kingdom is a startlingly disunited place. Inequality between the richest region (London) and the poorest (west Wales and the valleys) is greater than in any other EU member state. While London often emerges from the statistics as the wealthiest region in Europe, some of the UK’s peripheral regions are among the poorest. The current stance of fiscal policy is exacerbating this regional inequality. Take social security. Social security systems can be effective mechanisms for regional rebalancing. Payments are made ‘on demand’ on the basis of individual entitlements. The automaticity of these payments and their low visibility makes them a robust way of responding to variable regional fortunes. But now the social security system is under sustained attack as part of the policy of fiscal austerity. Already-depressed parts of the country with high rates of reliance on social security payments are disproportionately affected. The long-standing policy of moving parts of the civil service to depressed regions has also been ended by austerity, with some specific localities badly hit by public sector employment cuts.

There is a view, particularly on the right, that fiscal mechanisms for regional redistribution are counterproductive: that relatively well-paid public sector jobs crowd out private sector development in the regions, and that social security benefits have created a dependency culture affecting whole communities, not just individuals. Thus the UK’s poorest regions have become laboratories for testing the theory of ‘growth-friendly fiscal consolidation’. This means putting faith in monetary policy, and therefore in the financial sector, to lead the way out of recession, but it is becoming evident that the financial sector will lead the way back up the path already travelled: underpriced risk, emerging asset bubbles and regionally unbalanced growth.

In most of Europe, secessionist movements are led by the richest region in the state: Catalonia, Flanders, Lombardia. The UK has a different dynamic because the richest region dominates politically as well as economically. Both main parties have located the median voter in the Southeast, and they pitch their policies accordingly. This regional bias sits oddly with the constituency system of representation, which is susceptible to localised and regionalised politics. We see this tendency only rarely because the party system counteracts territoriality by proposing policies for the whole of the UK and maintaining party discipline in support of those policies. So long as each party had a clear class basis that cut across regional differences, they were able to do this easily: so easily that they have become complacent. They have never really had to build coalitions of support across the UK or use their party structures to resolve regional conflicts.

This is likely to change. Devo-max has been promised to Scotland, which will require a new financial settlement. Inevitably, that settlement will affect Wales, and it is also likely to trigger a debate in the regions and major cities outside London about how power and resources are distributed in the UK.

Muddling through with the Barnett formula is not really an option. The formula provides a back door way of reducing the differences in per capita spending between the UK nations. However, it narrows the gap fastest when public spending is rising strongly. Austerity is disabling the process of convergence and locking in the historic allocation. In any case, it is not clear that we should converge on identical per capita spending by region. Some countries do use population-based distributions - VAT revenue is distributed among the German länder by population, for example - but other mechanisms are still needed to pick up the pieces of regional inequality, and fiscal crises occur periodically.

Respected commentators like the Institute for Fiscal Studies argue for a needs-based financial allocation to replace Barnett, but the more different the political preferences of the nations or regions, the harder it is to achieve agreement on a needs-based formula. A broad consensus about the nature of the welfare state has to underpin the formula, because agreement is required on which needs should be recognised. Policies oriented towards low-income households suggest a needs formula heavily weighted by income; policies to promote educational opportunity imply that the needs weights should reflect the youthfulness of the population, and so on. Negotiating a new formula in a climate of general austerity and deep disagreement about the maintenance of key pillars of the welfare state will be an immensely challenging task.

Another answer is to devolve more revenue-raising power along with spending obligations. The political left has sometimes toyed with this policy, attracted by a rhetoric of local empowerment. This is an illusion: financial autonomy for small units of government fundamentally weakens their ability to provide public goods and avoid fiscal competition. More financial autonomy means more beggar-thy-neighbour policies, as the unedifying example of Ireland’s low corporation tax and hidden subsidies to capital shows. It also means more exposure to economic instability. To balance the books with self-financed spending, each nation or region would have to cut expenditure in recessions, in response to falling tax revenue. The only way out of this procyclicality would be to borrow. If borrowing was allowed but the Bank of England did not stand behind sub-UK governments, there would be a risk of Greek-style debt crises. More likely, borrowing would not be allowed. That leaves countercyclical policy in the hands of the government in Westminster, and we are back at the root of the problem.

A political settlement becomes more difficult, the more intense the claims from the English regions. While UKIP’s pattern of support is currently weighted towards areas that perceive a threat from EU migration, the party is aiming to widen its appeal by invoking English nationalism in the regions against the cosmopolitan elite in London. As the Guardian put it on 26 September: ‘After the near-death experience of the UK political class in Scotland last week, Mr Farage is offering to do in England what Alex Salmond so nearly did in Scotland.’ This gambit exposes the weakness of both Labour and the Conservatives as unionist parties. MPs today have to think about how to win in constituencies which are alienated from national party politics. The party machines still carry a good deal of weight, but they do not bring the resources they once did. We see MPs go into battle for their constituencies and their regions on every major infrastructure project. Pork barrel politics, where seats are won or lost by the central government spending that the candidate pulls into the constituency, are likely to become a more persistent feature of the political landscape.

The union is not in a happy state. A favourable fiscal settlement and a substantial financial services industry encouraged Scotland to stay in. Other parts of the UK do not enjoy these benefits from integration, and we should not be surprised if they respond by voting for candidates who promise to focus on constituency interests and deride Westminster. UKIP may turn out to be more important for the disintegrative pressures it places on the UK than for its stance on Europe. The two are linked, not only by a common thread of alienation from remote power, but also by the failure of central government in the UK to share the costs of economic integration and spread the benefits.

Wednesday, 6 August 2014

Broken Politics?

Tony Wright

It is a commonplace of commentary that the Westminster political system is broken. Here is the political journalist Gaby Hinsliff, recently reviewing a book on lobbying : ‘Politics is broken, the system rotten to the core. That’s the defining belief of our era and it’s one for which nobody quite yet has a satisfactory explanation’ (Guardian, 8th March). Exactly so. The belief is shared by those on both left and right, and by both broadsheet and tabloid commentary. It was also a central theme of the independence argument in Scotland. But is it true? Or is it the sort of thing that is most easily believed by those who have never experienced life in a genuinely broken polity?

There is plenty of evidence to suggest that, if not quite broken, the system is near to breaking point. As an election approaches, both the Conservatives and Labour hope to scramble into office with little more than thirty per cent of the vote, perhaps stitching up another coalition with the remaining Liberal Democrats (once the party of permanent opposition, now the party of permanent government) if necessary. This is hardly the basis for legitimate or effective government. If the charge against the present coalition is that it was voted for by nobody, concocted after the election on a programme not endorsed by the electorate, this may well happen again. At the very least, the parties ought to be pressed before the election on their post-election intentions.

Yet this merely reflects a changed electorate, from which not even the electoral system can any longer be relied upon to produce majority party governments. The significance of this change is not yet fully understood. The distinctive merit claimed for the Westminster first past the post electoral system was that, whatever its representational deficiencies, it delivered majority governments that could govern and a clear line of electoral accountability. The fact that this claim can no longer be made means that the old argument about the electoral system takes a new form, in terms of the need to reflect the realities of a changed electorate. In this sense the central prop of the system can properly be described as broken.

However it is not just the electoral system that looks broken. The more general (and familiar) picture is of an electorate that votes less and distrusts politicians more, of shrinking parties and growing political indifference. As power seems to have gone elsewhere, and as political choice has narrowed, democracy has atrophied and seems increasingly to become the preserve of a class of office-seeking politicians, with only a new populism of the right filling the vacant political space. It is not difficult to construct a narrative of broken politics from this mixture.

What is more difficult, though, is to suggest that these trends are somehow peculiar to Westminster politics, or even especially marked there. Only a characteristic parochialism permits this. In fact these are trends that are pervasive across the developed democracies. Bringing together all the available evidence, the political scientist Peter Mair has described what is happening as ‘the hollowing of Western democracy’. There are national variations, but the picture is a general one. If politics is indeed broken, then it is not just broken at Westminster.

But is it broken at Westminster? In global surveys of good governance Britain typically comes about halfway down the premier league, which certainly indicates room for improvement but hardly suggests a system that is broken. It also displays a capacity for responding to what is thrown at it, from financial crisis to the demands of separatism, and its adaptation to the requirements of coalition government has been striking. In this sense the system continues to muddle along, despite all the changes in the surrounding environment.

In fact it has done rather more than this. It is heresy in Britain to suggest that anything in its public life may have got better, but in terms of accountability it most certainly has. It is scarcely too much to say that over the past twenty years there has been a revolution in accountability. From human rights to freedom of information, with much else along the way, governments have been held to account in a way that was previously not the case. The revelations about abuse in public institutions from a generation ago are a reminder of the closed and secretive culture that has been opened up. Parliament has become a more assertive institution and governments can get away with much less (as seen most sharply in last year’s vote on military action in Syria). Nobody talks about the system as an ‘elective dictatorship’ these days.

A similar argument can be made about standards of conduct. It is just twenty years ago, in a climate of sleaze, that John Major established the Committee on Standards in Public Life as a standing watchdog. Since then public life has been increasingly regulated by a range of new regulatory bodies. A commission monitors political donations and party spending. Politicians now have to account for every paper clip and live in a goldfish bowl of transparency and ethical regulation. The idea that public life is rotten and corrupt, or more so than it once was, is embedded in contemporary culture; but it is nevertheless wrong.

None of this means that all is well, or that the system does not require a range of political reforms. It is absurdly over-centralised and its representational deficiencies are evident. There are always new accountability deficits that demand attention. Some serious constitution-making will one day be required. But none of this is advanced by lazy rhetoric about a broken and rotten politics. This merely serves the purposes of those who like to encourage the belief that politics and politicians are there to be disparaged, which in turn fuels further democratic disengagement and disconnection. This belief may well have become the defining belief of our time, for which there is a ready market, but it should not be allowed to go unchallenged. Reform requires a realistic understanding of what is wrong; and a determination to work to put it right.

Tuesday, 25 March 2014

The End of an Era in Pension Reform

Deborah Mabbett

The Financial Times (20 March) called it ‘the biggest pensions revolution for almost a century’ but their timing is a few decades out. The Chancellor’s budget announcement on the lifting of constraints on drawing down retirement pension pots is the end of an era that began, not in 1921, but in the 1980s. Under Thatcher, the government sought to curtail spending on the state pension and promote private provision of retirement income. Private pensions would, supposedly, perform so well that state provision could die back under the heavy mulch of the funded layer, managed by our cutting-edge financial services industry and reaping the high returns that followed the big bang of financial market liberalisation.

What happened instead was that the inadequacy of the National Insurance pension, linked to prices at a time when wages were rising strongly, brought increasing numbers of elderly people into the means-tested part of the social security system. This system was made more generous under Labour, which at least did something to address the problem of pensioner poverty. But it damaged the strategy of promoting private funded provision, because savers faced a ‘better off’ problem. Basically, it was not worth saving for retirement if the expected level of savings was insufficient to steer clear of means-testing.

It was against this background that the Turner review found that we must return to a basic state pension, whether universal or contributions-based, which would be adequate to live on, so that means-tested supplementation could be put back in its box. This was strongly supported by the financial services industry, which had detected the potential for another mis-selling scandal affecting private pensions taken out by low income earners.

The industry’s problem became the government’s problem with the advent of automatic enrolment. While this has been marketed to the public as a clever application of behavioural economics, its public policy feedback effects have been neglected. If a government tells everyone that they will be better off saving for their retirement, and ensures that they are defaulted into schemes, then it risks some pronounced negative feedback if people are not in fact better off. Thus the recent scramble to find ways of ensuring that excessive fees are not skimmed from auto-enrolled pensions, and thus the decision announced in the budget to allow people to draw on their savings pots as they please.

Back to Beveridge?
The government is taking a risk: it is quite likely that many pots will be used up early in retirement, leaving people dependent on the state pension alone. The calculation is that the state pension will have to be paid anyway, so there are no savings for the Exchequer to be reaped from limiting drawdown. This assumes that means-tested supplementation will shrink and become confined to people who would never have saved for retirement. This is the point of the Triple Lock: it will keep the state pension at a sufficient level of adequacy. For historians of social policy, this is not the biggest change in a century but a return to Beveridge, who planned that flat-rate National Insurance benefits would drive out the remnants of the Poor Law. That plan failed, but this one might succeed, because the costs of failure will rebound on a government that has become in effect the main sales agent for private pensions.

The budget announcement has been pitched as an end to compulsory annuitization, brought about by the failings of the annuities market, supposedly about to be forensically exposed by a now-redundant retirement income Market Study. This is smoke and mirrors. The media have proved wonderfully manipulable: few have pointed out that compulsory annuitization ended in April 2011. What stayed after 2011, and will now go, was a set of rules limiting the drawdown of funds from pension pots. These limits were set with reference to annuity values, but the government had the option of allowing more drawdown, and it exercised this option recently when it raised the drawdown limit to 120% of the corresponding annuity value. If annuities market failure was the problem, the drawdown limit could have been raised further.

The real problem is not the annuities market, but low interest rates on low-risk investments. Low returns are making money purchase pensions look rather sickly at the point of retirement, but they look twice as ill on a realistic assessment of the income stream they will generate. So let’s use a bit more behavioural economics, this time to cover the tracks of low returns. People value the lump of money in their pot at retirement far above the income stream it will generate. The government can avoid a tide of complaint about the results of auto-enrolment by letting people take their pots as lump sums.

Um – so what is the point of auto enrolment, since it is not to generate a retirement income? Some will invest the money differently: by paying off their mortgage, or buying a rental property. Buying a new car (preferably one that does not depreciate as fast as a Lamborghini), or replacing domestic appliances, or double-glazing the windows, might also be sensible decisions. The government is right that people may find better ways to use the money than the financial services industry can offer them, but it still leaves the question of why exactly auto-enrolment took this money in the first place. Why only get the lump sum at retirement? What about other times in life when a lump sum is useful? Perhaps we should just be allowed to draw down our pots every ten years or so? It’s not a rhetorical question: New Zealanders can draw on their auto-enrolled KiwiSaver pots to buy their houses; Americans can take money out of their 401k schemes if they are made redundant or face other major costly events.

It is well-known in public policy-making that problems are redefined to fit the solutions that are available. The solution is auto-enrolment, that beacon of ‘nudge’ policy-making. With a bit of imagination, we find a problem for it to solve. Here it is. The age of eligibility for the state pension is rising. Some people are working longer, but many are not. Life is tough for those who stop working before the state pension age. The available benefits have been cut in real terms: no triple lock for them. The process of claiming benefits, designed to deter scroungers and benefit tourists, will keep many self-respecting citizens from entering the doors of JobCentre Plus. How to survive until reaching pensionable age and entering the promised land, protected by Conservative voters? Answer: tap the pension pot that has been accumulated, which can be accessed ten years before the state pension age. Draw it down carefully, working towards the definite end date of pensionable age, not to an uncertain life expectancy.

One final question: what if about those who really want to save to provide income for their retirement, and do not want to be a landlord, or run their own share portfolio? The Chancellor does have something for them after all. For people aged 65 and over, NS&I will launch ‘market leading’ pensioner bonds, paying a significantly higher return than other safe assets. The financial crisis taught everyone that the financial system is underpinned by the state, but large parts of the industry already knew that. The annuities market in particular has always been heavily dependent on the government to provide the financial instruments that it needs to match its liabilities. Reformers have periodically advocated that the government should boost the market by creating tailor-made instruments such as ‘longevity bonds’ that would shift some risks from the insurer to the taxpayer, a process which we’re now all thoroughly familiar with. In this light, the new bonds from NS&I are a great step forward: pensioners will be able to secure an income stream directly from the government, rather than paying the masters of the financial universe to buy government bonds to back an annuity. No wonder the share prices of some financial intermediaries fell. At this rate, we’ll return to having a welfare state by the back door. It might be expensive, but now that we know how much financial intermediation can cost, the welfare state is beginning to look like quite a good deal.

Tuesday, 21 January 2014

Breaking Britain?

Tony Wright

It turns out that breaking up is not so very hard to do. It might have been thought that the prospect of the breaking of Britain, which would be the consequence of a yes vote in Scotland’s referendum later this year, would be exciting passions throughout this presently United Kingdom. After all that is what secessionism usually provokes. The fact that this is not so is therefore significant. This is not Canada desperately trying to hang on to Quebec, or Spain relentlessly denying Catalonia its independence (where a referendum later this year has been declared illegal by Madrid). Not only has Scotland got its referendum, without any real fuss apart from a little spat about the question to be asked, but everyone seems perfectly relaxed about both the process and the outcome.

Of course this could be because there is confidence that the polling evidence so far is correct, and that Scotland will decide to stay. This is clearly a factor, but it is also not the whole story. There is something more going on here. The benign view is that we have such a seasoned and civilised polity that it is able to take even a putative secession in its stride, refusing to make too much of a fuss about it. The less benign view is that we have lost the capacity, and the will, to tell a story about Britain that might make people want to continue to be part of it, so that separatism is encouraged by default.

It is also complicated by the fact that the Conservatives are now so depleted and discredited in Scotland, having fewer MPs there than there are pandas, that a Conservative (and unionist) prime minister is unable to lead a charge to save the union. David Cameron would not want to be remembered as the prime minister who allowed Britain to break up (nor, though less certainly, as the prime minister who allowed Britain to leave the EU), but in the case of Scotland he is able to be only a bystander. His only role is to keep out of the way. The further complication is that losing Scotland would bring electoral advantage to the Conservatives, which is why many in the party are quite sanguine about the prospect.

The case of Labour is different, but also difficult. It can hardly say that it wants to keep Scotland because it provides a ticket to power for the party at Westminster, and that without it an electoral majority would be much more elusive, yet this is the brutal political truth. It would need to convert this into an argument for a broad British progressivism which goes beyond merely a ‘better together’ defence of the status quo. Yet this is made even more difficult by the fact some on the left have decided that, while social democracy is defeated in the rest of the United Kingdom, it could nevertheless be preserved in Scotland and that independence should therefore be supported. Solidarity is exchanged for clinging to the wreckage.

In some versions of this argument there is an anticipation that independence for Scotland would produce a political reawakening in England too, even one with radical possibilities, as the English were shaken out of their constitutional lethargy by the need to work out what kind of country they wanted to be. However it as least as likely, perhaps even more so, that the reverse will happen and (alongside a movement to leave the EU) England will turn in on itself and settle for an unpleasant narrowing of outlook and spirit. Already there is a view amongst many in England not only that Scotland should go its own way if it wants to, which might seem relaxed and generous, but that its departure would be actively welcomed (and would be even more so if it could be persuaded to take Northern Ireland with it). What Scots are not hearing is a chorus of English voices asking them to stay.

This would require an attachment to an idea of Britain which has clearly weakened. The props that supported the post-1945 world of Britishness – of common sacrifice in war, and common endeavour in building a welfare state – have slipped away. Nothing has been found to replace them. Some of the attempts to do so, by those who have worried about their absence, have been embarrassingly vacuous. On one side globalisation mocks the nation state; on the other side, an old kind of national unity is fractured by the explosion of difference in the population. The result is that, faced with the prospect of Scotland’s separation, Britishness now seems to have too little to draw on to be able to mount a vigorous defence of itself.

What might such a defence consist of? It might suggest that there is a capaciousness about the idea of Britain that enables difference to be accommodated, in a unity that embraces diversity. It would celebrate the fact of multiple identities, including not excluding, and offer to the world an example of how this might still enable a common life to be lived. It would therefore resist the idea that separate identities required separate states. It would not be afraid to recognise its shared past, while confident enough to embrace a picture of a shared future. As far as the left is concerned, it would involve a version of Britishness that emphasised solidarity and provided the materials for an assault on the disfiguring inequality that separates some parts of Britain from others.

Nor is such a version of Britain (and Britishness) fanciful. In many ways it only describes what is happening. Devolution might look like a constitutional mess, but it is a mess that works. A generation ago Wales was blighted by the divisive politics of language, but now has settled into an easy-going bilingualism. A Labour government at Westminster delivered substantial self-government to Scotland, recognising its distinctive claims (and even putting in place an electoral system that would deny itself majority power). Whatever the referendum result, Britain is moving towards a kind of quasi-federalism that splits power up. Breaking up may not be hard to do; but it is also not inevitable.