Council Cuts Haven't Affected Services, Have They?

Local Councils have borne the brunt of the Coalition Austerity cuts as services like education and health have been ring fenced. In Lewisham, following the setting of our Budget for 2014/15 in February, we have agreed savings of around £97m so far. Most of these have been implemented, with the rest due over the course of the next 3 years. On top of this, our current best estimate is that we will need to make savings of a further £80m between now and 2017/18. But this should be fine because to date, cuts to Council budgets have led to increases in customer satisfaction. At least this is the message that has been put about in the media and seems to have taken root in the minds of the public. I think this is a myth, akin to the one which blames our current national debt woes on the profligacy of the previous Labour Government.

The origin of this myth were various reports by the BBC, eagerly seized upon by David Cameron and other media organisations, based on a poll they commissioned from ICM that was published in October last year. An example was a report by Mark Easton, the BBC's Home Editor, entitled, Public Service Cuts – did we notice?, published on the BBC's website on 9th October 2013. He opened with this:

Many people in the UK think the quality of public services overall have been maintained or improved in the past five years despite government cuts, 

before going on to elaborate with this:

It is five years since the bail-out of the banks marked a new era of austerity in Britain amid warnings that deep cuts to state spending would see the standard of public services plunge.

But today's poll by ICM suggests six out of 10 people think service quality has been maintained or improved.

At the time I thought this research told a rather different story and that the claims being made based upon it would soon be seen to be going a bit too far, to put it kindly. Silly me. Nearly six months on and this tale of 'cuts, what cuts?' remains the received wisdom. I would offer 3 points that I think undermine this claim.

Firstly, many of the services that the pollsters enquired about are in the education and health sectors and are therefore delivered by services that have had their budgets protected.

Secondly, despite Austerity, during this Coalition administration, many public services are seeing improvements including the completion of investment programmes, that stem from the policies of the previous Labour Government. In Lewisham, for example, we have spent the last 3 years rebuilding and renovating many of our schools, libraries and leisure centres and improving our housing stock. We are also currently in the middle of replacing all our street lights. This is due to the resources made available by the last government.

Thirdly, the BBC's presentation of the poll results was extremely subjective and, when judged against the actual data, I would say, biased. If you look at the results as they appear in the full report (you don't have to look far – it's on page 1), you will see where the BBC got its 6 out of 10 figure from. ICM posed the following question:

Thinking about public services overall, do you think the quality of public services has got better or worse in the last five years, or has it stayed the same? Is that much or a little better/worse?

In response, 3% of people said got much better, 12% said got a little better and a whopping 42% said stayed the same. So 57% is rounded up to 6 out of 10. What the BBC didn't say was that 20% said got a little worse and another 20% said got much worse, with 3% saying they didn't know. Wouldn't a fairer headline have been:

40% of people think that government cuts have reduced the quality of public services'

followed later by the perfectly fair point that,

Yet, remarkably, 15% of people think that service quality has actually improved.

Perhaps I am in danger of disappearing down a wonkhole here but surely I can't be the only one who thinks that, presented in this way, the piece would have generated a very different reaction?

What Was Really Behind The Pension Reforms In Last Week's Budget?

Chancellor's decision in the Budget to release people from the obligation to use their pension pots to purchase an annuity has been broadly welcomed. The Coalition have portrayed it as a blow for individual freedom and evidence that they trust people to make the best decisions when it comes managing their own money. In fact, what it may be is an attempt to release a vast reservoir of previously protected funds, allowing the financial services industry access to it so it can sell new products to people designed to provide them with the money required to pay for the social care they will need in their old age. In other words, the government's policy response to the Dilnot Commission is a deregulation of the pensions industry that will leave people arguably less protected and more vulnerable to the marketing departments of large financial institutions. I came across this blog post from John McDermott of the FT. It's only short and well worth a read. He quotes a section from the Treasury's post-Dilnot formal consultation document entitled Freedom and choice in pensions. This basically says that the government spoke to the big financial firms with a view to coming up with a market solution.

'The review identified that the financial products most likely to develop in the short term will leverage the assets people have, specifically housing and pension wealth'.

McDermott says that the pension changes announced in the budget... 

'...will provide a source of money for the financial products the government wishes to see developed for those in need of social care'.

Given the track record of the financial services industry over the last decade or so, I think it is fair to ask if we have witnessed the origin of the next major miss-selling scandal that will rock the nation in ten years time.

Have The Tories Given Up On Winning The Next General Election?

Last week's Budget seems to have been very well received, albeit by a predominantly conservative (deliberate small 'c') leaning media. It was, after all, a budget for the prosperous, benefiting as it did those with large pension pots who now won't be trapped in low-yielding annuities at retirement and those who can afford to save £15,000 a year in ISAs, or NISAs as they have become. This has been seen as a masterful piece of political craftsmanship, establishing the ground for a rally in Tory support in the run-up to next year's General Election. George Osborne's reputation as a political tactician par excellence was further cemented by a YouGov poll commissioned by the Sunday Times that showed that a surge in Tory support following the Budget had cut Labour's lead in the opinion polls to 1% from 8% just 7 days ago.

I must confess that when I heard the Budget on Thursday my first thought was that the Tories had given up on any chance of winning an outright majority in at the next Election. The Tories currently have 303 seats in the Commons and need another 23 for an outright majority. No doubt they have a list of their top target seats. They can't surely believe that there are people in these places with large pension pots and £15,000 every year to invest who didn't vote for them last time but will now thus be making all the difference? Nor can they believe that 1p off a pint and halving the tax on Bingo halls will persuade enough people to switch their voting intentions, thus pushing them over the finishing line. I can only think of two possible explanations for this particular Budget. The obvious one is that it was an attempt to shore up their support and prevent their voters from switching to UKIP. 

The other is that the Tory High Command is so out of touch with ordinary people that it seriously believes that there are far more well-off people out there than in fact exist. That is, that most people are really like them, so policies that appeal to them will appeal to everyone else. And as for the lower orders (Cor Blimey Mary Poppins), then they will be satisfied with cheaper beer and Bingo. 

This theory is not as fanciful as it appears. We did after all have Grant Shapps singularly ill-judged tweet, saying that the Conservatives were 'helping hardworking people do more of the things they enjoy' by cutting the Bingo tax and beer duty. More telling I think was the Michael Ignatieff's experience, as he retold it on BBCR4's Start The Week Programme a fortnight ago. In short, while pursuing an academic career at Harvard, he was persuaded to enter Canadian politics, eventually becoming the Leader of the Liberal Party, where he led them to their worst ever defeat in the elections of 2011. He made the point that during that election campaign he thought he was doing really well so his trouncing came as a tremendous shock. The reason he was sure he was doing well was that he spent all his time with people who supported him, campaigning in places that supported him and attending rallies full of people who adored him.

Ignatieff's experience was not an isolated incident. It was, in fact, a forerunner to that of the Republican Party in the 2012 Presidential Elections where Obama comprehensively defeated Romney. There are loads of great You Tube clips showing Republicans making grand and sincere claims for a Romney landslide and then showing their bewilderment and disbelief as the results come in showing an Obama victory. Here's Karl Rove embarrassing himself, and here is Sarah Palin doing it with knobs on. If you view these you will see a whole host of other suggested things to view that demonstrate how disconnected the Republicans were to the majority of ordinary Americans.

As for that bounce in the opinion polls, I had a closer look. The headline figure is Labour on 37% and the Tories on 36%. Yet for those voters living in households with incomes less than £25,000, then the figures were Labour - 42% and the Tories - 29%. Even in those households with incomes between £25,001 and £39,999, the figures were Labour - 42% and the Tories - 33%. These people account for the vast majority of voters – UK median household income in 2011/12 was £23,200 according to the ONS. I am not qualified to write knowledgeably about polls. However, what this tells me is that the Labour Party has everything to play for. But we must do two things. Firstly, we need to stop wasting resources campaigning in safe seats where all we are doing is working to increase margins of victory. Second, we must concentrate our efforts in campaigning and above all getting our vote out, in our target wards.

In any event, the local and European Elections in May will probably tell us a very interesting story.

What Do Bob Crow And Warren Buffet Have In Common?

The deaths of Tony Benn and Bob Crow last week led to many discussions about left wing politics. Much of what was said seemed like ancient history as far as these two figures' political views were concerned. My favourite Bob Crow moment came when he was being interviewed by Edward Stourton for the BBC at the height of the Iraq war. As the interview came to an end, Stourton asked Crow what he thought about the war. Quick as a flash Crow replied 'What war is that?' Laughing, Stourton said, 'The War in Iraq,' to which Crow retorted, 'I thought you meant the Class War,' before going on to say, essentially, that his members were more concerned with what was going on in the UK, rather than in a foreign country thousands of miles away. I remember laughing out loud at this bit of masterful showmanship. However, it would appear that Crow was being something of a canary in the coal mine, as following our experience in Afghanistan, Iraq and Libya, MPs failed to support military action in Syria as they belatedly realised that the general public were not behind it. As a number of people put it to me, they felt very sorry for the people of Syria who were suffering but they thought that military action would be costly yet ineffective and that the current job of the government was to do something to improve the lot of its own citizens rather than the citizens of another country.

'Class War' does sound like a anachronistic slogan to me. Or maybe I feel it's just a bit too impolite and possibly offensive and I wouldn't want to upset anyone. Yet whatever you want to call it, something has been going on since the 1970s across the developed world that has drastically altered the distribution of income and wealth. Those at the top of society have pulled away from those in the middle and at the bottom, while those at the very top have pulled away even further from everyone else. This has led to levels of inequality not seen since before WWII in some places. The most recent chart I have seen that shows the rich getting richer not just by taking a bigger share of newly created wealth, but also by taking income that used to go to those at the bottom and the middle, is this one from the economist Paul Krugman's blog:

This data from the Economic Policy Institute shows that between 1973-2012, hourly real wages for men in the US have fallen for the lowest 60 percent of male earners. It's the picture painted by facts like these that led the legendary investor Warren Buffet, to famously remark:

“There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.”

So on this point at least, we can say that Crow and Buffet would be in agreement.  

One of the reasons given for the ability of the better off to appropriate more and more income and wealth for themselves, has been the decline in union power. We are particularly prone to scoff at this in the UK, because we have a national story which says that the economy was brought to its knees in the 1970s because of excessive union power which culminated in the Winter of Discontent in 1979. This led the country to turn to the Conservatives who, under Margaret Thatcher, transformed the nation from the sick man of Europe into a vibrant, prosperous, modern economy, by employing policies of privatisation, market deregulation and curbing the power of the unions. I think most people would accept the view that the unions do have a case to answer for the way they behaved up until 1979, as demonstrated by the fact that the last Labour government didn't repeal any of the legislation enacted by the Tories to reduce their powers. However, here is an inconvenient truth: 

In the UK, economic growth was higher during the period of supposedly excessive union power than during the new age of private sector dynamism ushered in by Thatcher. Between 1948-1978, average real capita GDP in the UK grew at 2.17%. Between 1979-2001 it grew at 1.99%. If you include the period from 2002-2012, where it grew at less than 0.8% on average per year, then the post 1979 figure drops to less than 1.6% a year. By contrast, between 1960-1978, when union power was arguably at its height, average real capita GDP grew by 2.4% a year.

These figures seem to turn our national story on its head. Therefore, maybe we shouldn't be so fearful that, if a rise in worker power is what is required to restore living standards and increase equality, then the result need not be a collapse in growth. Perhaps it is possible to have higher pay for the bottom 60% and higher growth for the economy as a whole? It looks like that's what we had in the past.

Next Week's Budget

In his column in yesterday’s Sunday Times, David Smith reminds us that it is only 10 days until the Budget, but you could be forgiven for thinking it has been cancelled bearing in mind the complete absence of the usual pre-budget speculation. According to him, even the Treasury seems reluctant to talk about it. He does believe however, that when the budget is delivered we will hear a lot about how ‘the government’s plan is working.’

What plan would that be, exactly?

The economy has suffered 4 years of swingeing austerity, equivalent to more than a 5% cut in GDP according to the Office for Budget Responsibility (OBR), based on a belief that if state spending was cut, then the private sector would more than expand to fill the gap, thereby delivering net growth to the economy. However, what belief in this doctrine of ‘contractionary expansionism’ has produced so far is an economy that remains smaller than it was before the crisis, with levels of construction and business investment still struggling to get back to the levels they reached under Labour in 2010. Smith has been increasingly upbeat about the economy’s prospects in recent months, yet even he concedes that, ‘Every housing gathering I attend….rightly bemoans the low level of house-building.'

Austerity was supposed to be the price we needed to pay in order to reduce the deficit and prevent our unsustainable debts from being passed on to our children and grandchildren. However, its achievement in this regard has been modest. In 2009/10, Government borrowing was £157bn. This year, 2013/14, the OBR predicts that the budget deficit will be £111bn. That’s a reduction of just 30%. And £111bn is still a very big number. What doesn’t seem to be widely understood is that most of the heavy lift of this reduction has come from the Coalition's decision, when it first came to power, to cut government capital spending by half. This is spending on schools, hospitals, roads, libraries, leisure centres and social housing. (In the case of the subsidy it gave to building social housing the cut was 60%). So in order to protect future generations from the burden of our debts, we are bequeathing to them a legacy of inadequate and decaying public infrastructure, buildings and housing stock that they will have to put right via higher taxes and debt.

Maybe we can afford to be a bit more sanguine about the future now that growth is returning. Let’s hope so. Yet the return of economic growth should not be a cause for celebration, although it does come as something of a relief. The witness of history does seem to be that the normal state of affairs is for economies to grow. And our economy has been helped along by the massive fiscal stimulus that is Help to Buy, a measure that the Coalition were panicked into in 2013, when 3 years of their austerity policy seemed to have achieved nothing but economic stagnation. You would think that it would be reasonable to expect that a commitment to provide £130bn of tax payer guarantees for sub-prime mortgages would generate something in the way of growth. Whether this will prove sustainable is another question entirely. News from the National Audit Office that many beneficiaries of the scheme have managed to buy homes by putting down deposits that are even less than the tiny 5% required, can hardly be reassuring.

So, can we feel confident about the future when we hear the Chancellor’s upbeat, self-congratulatory message next week? If the UK is an island geographically, it certainly isn’t economically. In 2012, George Osborne blamed problems in the Eurozone for blowing the UK economy off course. Arguably the world economy is weaker and more fragile than it was then. Europe is possibly heading towards serious deflation, as the Japanese economy experienced from the 1990s onwards. The economic data from the US appears to be softening. China is struggling to maintain growth at 7.5% and is contemplating more fiscal stimulus, despite being already heavily indebted. Other emerging markets appear very weak, being also heavily indebted and overly reliant on the cheap finance provided by US quantitative easing that has sped off around the world searching for a high return. The Japanese economy is still struggling to achieve escape velocity from its two decades of malaise. Cheap money is blamed for asset price bubbles in equity markets and house prices not just in London, but in places like Australia, Denmark, Norway, France and Germany. 

Will the UK economy be able to get back to 'business as usual' in these circumstances?

Last month it was reported that the investor George Soros, who was one of those widely credited with predicting the economic crisis in 2008, had placed a $1.3bn bet that US equities would fall. Yesterday, the FT reported that Seth Klarman, one of the world's most respected investors, was concerned about ‘nosebleed valuations’ in technology stocks and ‘bubbles inflating’ in other parts of the economy. He talked about ‘When markets reverse’, not if. They are not the only ones who think things are going to get worse before they get better. Personally, I think it is at least an evens bet that we will be hearing calls for concerted international action to ward off the consequences of the next stage of the economic crisis that began in 2008, before the General Election next year.

Housing Benefit - A Vast System Of Outdoor Relief For The Private Sector

There were a couple of interesting contributions to the housing welfare debate last week. The Inequality Briefing website's latest post, using data from the ONS Labour Force Survey, said that: 

In 0.5% of all households containing more than one generation all adult members reported never having had a paid job. In one third of these households, the members of the younger generation reported leaving full-time education less than a year ago. 

Its hard to believe that worklessness is an epidemic in our society when only 1 in 200 multi generational households contain no-one in employment. That is not to say that it isn't an issue that politicians and policy makers should address. But it is not possible to portray it as the most pressing social problem of our age. 

Also last week, the GMB released the results of an investigation into housing benefit, entitled HUGE PAYMENTS FOR HOUSING BENEFIT IN LONDON SHOWS LANDLORDS ARE THE REAL WINNERS FROM BRITAIN'S WELFARE SYSTEM. The language employed is rather colourful, but the underlying message is clear: Housing Benefit Is Big Business. With much of the £23bn a year bill going to large companies and wealthy individuals, this assertion is hard to deny. The Earl of Cadogan is given as an example, with Cadogan Estates Ltd allegedly getting £116,000 from Kensington & Chelsea; as is the Duke of Argyll whose Argyll Estates is believed to pocket £126,000 from Argyll and Bute Council. 

Whilst the appearance of these noble lords on the list of those landlords receiving the biggest payouts will no doubt raise the blood pressure of any right thinking Socialist, their receipts from the public purse is mere chicken-feed compared to that of other less aristocratic and more anonymous landlords. For example, Caridon Property is said to take in £2.6m across 9 London Boroughs, while Atlas Property Services rakes in £1.8m from the London Borough of Ealing alone. 

What struck me is the scale of Housing Benefit. It's not just the size of the annual bill to the taxpayer, rather it is the degree to which this welfare benefit has become dispersed through the housing market. Leaving social housing to one side, the GMB estimates that nearly 40%, or 2 in every 5, of private rented households across the whole country are now in receipt of Housing Benefit. Yet only around 7% of the workforce is unemployed. In London, perhaps surprisingly, the figure is lower at around 34%. But this average covers a very wide variation, from 70.5% in Enfield, 61.3% in Barking and Dagenham and 57.7% in Croydon, down to only 10.8% in Kensington and Chelsea and 2.45% in the City of London. 

The figure for Lewisham is 39.6%, so we are around the national average, but somewhat above the London average. So a closer look at Lewisham may tell a story that is similar to that for the country as a whole. In 2012/13, the Council paid out, on behalf of the Government, an estimated £228.4m in Housing Benefit and £32.4m in Council Tax Benefit. We have 120,000 domestic properties in the borough. This includes owner occupiers, private rented, council and other social rented dwellings. In 2012/13 39,112 of these properties, or 32.6%, were in receipt of Housing Benefit. That's nearly a third. Yet the total number of unemployed people at the end of 2012/13 was about 10,400.  That's just over 5% of the working population.

So it would appear that the majority of Housing Benefit, which is funded by taxes raised on everyone, including the poorest in society, goes to those in work, as a subsidy to their employers who are not paying them a wage that can support them. It then gets passed on to landlords, probably all of whom are relatively well-off, some of whom are very wealthy individuals indeed, and some of whom are multi-million pound businesses. 

If William Beveridge were to pay us a visit today, I think he would have to conclude that this part of the Welfare State has evolved into something that he and its other founding Fathers neither expected nor desired. It must now be time for a radical rethink.