Another Country?

On 18th September 2014, the Scots go to the polls to vote on whether Scotland should become an independent country. I hope that they vote to stay part of the UK. Whichever way they go, there ought to be a General Election in the UK. But there won’t be.

I’m not Scottish, but have some affinity for Scotland. When my father first came to the UK at the beginning of the 60s, it was to the Clyde shipyards where he did his apprenticeship and to lodgings in Paisley. Even now, more than fifty years on, there’s a distinct Scot’s “Helloooo” to his telephone answering. The first house my parents bought was in Kilwinning in Ayrshire when I was a baby and I lived there until I was 3. It is only in recent years that we have stopped getting Christmas cards from our old neighbours or indeed my Dad’s first landlady and that is down to some of them having passed away and my Mum’s numerous house moves in the past decade. My earliest memories are of boat trips on Loch Lomond (which I called Loch Mondo, which I still think is a better name) and playing on the beach at Saltcoats, aptly named as every photo from that time, even if labelled “August ’74” has everyone in thick jumpers, wellies and overcoats. I liked going up to visit my sister when she started a PhD at Glasgow University (although in a murmur of what has come since those early post-devolution days, it did seem odd that she and the other students who had come from England were categorised as “International Students”). One of the nice parts of the job that first took me up to Leeds was that I had responsibility for my practice area in Scotland too and got to go up to Glasgow and Edinburgh regularly. And just this year I’ve had a great time skiing in Glenshee and going to the Edinburgh Fringe Festival.

For me, Scotland has always in my lifetime had a very distinct identity of its own and clearly has had its own ways of doing many things. At the same time, while feeling like another country in a way which relatively nearby English places like Newcastle and Carlisle do not, it was part of the Britain I felt part of in a way that Ireland clearly isn’t, having been independent for a long time and having fought “us” bloodily for it. I can understand the Team Scotland v Team Westminster rhetoric of the campaign because the reason we moved from Scotland was that my parents didn’t want me to be disadvantaged by being a minority within a minority as Indian and Scots so they moved to England and I got the “Team Westminster” RP accent and education. But this does also show that the divide is false because in a united UK, you can move around and you can take your identity from the part you want. My Dad started as an honorary Scotsman (he must have stood out as a small Indian man amongst the welders and stood behind the goal at Ibrox watching his friend and former fellow apprentice making his debut for Glasgow Rangers) and moved, just as (accent aside) I feel an honorary Yorkshireman having spent 10 years in Leeds. That is just one of the things that a Yes vote would bring in, perhaps slowly, but surely enough.

However, I can understand emotionally why Scots might want independence and even that it might be worth doing despite the potential hardship that may be suffered in relation to using the pound sterling without UK agreement, needing to wait to be admitted to the EU (it is hard to see how countries like Spain which have their own secessionist regions and nations could support Scotland becoming an EU Member State while denying nationhood to Catalonia). Those arguing for UK exit from the EU also tend to believe it would be worth doing even if it had short to medium term adverse effects (although they generally make it sound as if there would be immediate benefits to outweigh these). As an aside, it is curious that when the UK and IP parts of UKIP come together they seem to result in denying the validity of Scotland’s claim to independence from the UK while wanting the UK to be independent from the EU.

What I don’t understand or agree with is the sudden rush over the past couple of weeks, apparently led by Gordon Brown, to offer the Scots a huge increase in powers and preservation of advantageous UK tax funding which mean that Scots per capita get 20% more public funding than other parts of the UK, if they vote to stay in the UK. There is certainly a case for a new settlement, and one which looks fairly at the claims of the other nations in the UK including England and the regions. The success of Scots devolution, the London Mayor and Welsh devolution (this last is successful only in terms of having provided strong local powers – that those elected to wield them have been terrible at so doing doesn’t matter, they can be defeated) and the high public engagement with the independence campaign make it hard to deny a similarly careful look at what everyone needs throughout the UK.

However, none of this, not the “Vow” to Scotland, nor the proper role of Scots MPs in Westminster (the “West Lothian” question), nor even the arrangements for the rest of the UK, has any democratic mandate in the UK. If there is a majority for independence, it is arguable that the Prime Minister should resign as the head of a pro-Union party and government (that perhaps being the distinction from the PM at the time of Irish Independence, another David, Lloyd George, who was not from the Unionist part of the Liberal Party and who did not resign when last the UK lost a constituent member). But, from a practical perspective, as the three main parties have been aligned on the main approaches to post-independence relations with Scotland, it would not be inconceivable that Cameron could start the exit negotiations and run them through to the scheduled General Election in May 2015 with a smooth handover should he lose that election. The one urgent change that would be required would be to pass legislation to limit MPs elected now and in 2015 for Scots constituencies from voting on matters other than those relating solely and specifically to Scotland.

However, the range of promises being made to Scotland if it decides to stay in the UK are a different matter. They involve large changes which were not in any party’s manifesto and which will have had no public scrutiny, particularly if, as suggested, they are rushed through ahead of the 2015 election. The opportunities and proposals for a broader constitutional resettlement and localisation can’t just be magicked up in a few months. The overall package of changes surely has to be mandated and this can only be done by dissolving Parliament and calling an election in which all the parties can set out what they propose to do for the UK as a whole, having retained Scotland within it. There are procedural difficulties due to the Fixed Term Parliaments Act which limit Prime Ministerial discretion over calling elections, but these could be overcome by agreement (for example, in the circumstances, there could be an unopposed motion of no confidence). It wouldn’t have to be immediate, but it should be before May 2015 and before any attempt is made to have a new Scotland Act granting further devolution to Scotland without doing anything for the rest of the UK of which Scotland will be a long term part.

But I’m not holding my breath. There seems to be no sign that this will happen and ultimately that would be the thing which meant that both Alex Salmond’s Team Scotland and Dave, Ed and Nick’s Team Westminster won with the losers being everyone else.

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Money’s Too Tight to Mention

Money’s too tight to mention

Oh mo-ney mo-ney mo-ney mon-ey

Mo-ney’s too tight to mention

I can’t even qual-i-fy for my pension

Many public sector workers will be striking on November 30. Notionally the dispute is about proposed changes to public sector pension arrangements which will lead to workers being required to work for longer, make larger contributions and, in many cases get lower levels of benefits when they retire. On that basis it looks very much like a lose, lose, lose situation so that it is hard to argue with the discontent felt by many public sector workers.

Realistically it is also likely that many who support the strikes do so not specifically because of the particular changes to pensions but because of a more generalised disapproval of the cuts (or more accurately overall, reductions in rates of increase) in public spending and perhaps a belief that there is a better more painless way of dealing with the UK’s economic problems.

Some of those who oppose the strikes do so on the basis that it is a bit rich for public sector workers who had 13 years of unprecedented growth in jobs and improvement in pay and conditions to seek to maintain pension benefits which are contributed to by private sector workers who have no such security to look forward to. This usually meets with the riposte that instead of looking to bring public sector workers down, the Government ought to be looking to improve private pension provision.

What happened to private pensions?

How could private pensions be improved though? This is the difficult question that tends to get pro-strikers to start to shuffle their feet and mumble something about “perhaps they ought to have joined unions to put pressure on their employers”. Unfortunately, this is not a helpful answer. This is because it wasn’t really employers who led the charge to minimise pensions for their employees even if they could have decided to carry on investing in them after the wind changed against this being so highly beneficial.

Tax!

Up until the mid-1990s the UK had the most generous private sector pensions in the EU. Although this is anecdotal, as I started to look for work ahead of graduating in 1993 (in the depths of another recession) most large private sector employers offered final salary pension schemes and the fact that the civil service and other public sector employers also did so was not a particular positive differentiator when choosing where to work. A significant contribution to this was the tax treatment of share dividends which was beneficial to shareholders and so of great importance to pension funds which are traditionally amongst the largest institutional shareholders. Another beneficial element of the tax regime was that companies could avoid paying tax on profits by investing them in their employee pension funds. 

The potential for using contributions to pension funds as a tax avoidance method was known about and Nigel Lawson as Chancellor of the Exchequer did a small “raid” on private pensions to attempt to switch the balance of incentives to encourage businesses to invest productively rather than squirrel money away in pension funds with large surpluses.

Advance Corporation Tax

The main tax instrument benefiting pension schemes was Advance Corporation Tax (ACT). This meant that share dividends were deemed to have already had tax paid on them up to the basic rate of income tax to avoid the same money being taxed twice (first as corporation tax for the company issuing the dividends then as income tax for the shareholders). This was of great benefit to shareholders like pension funds which did not pay tax on their shareholdings as they were then able to reclaim the ACT that had already been deemed to have been paid. Effectively ACT was a subsidy to private pensions. 

As part of the tax increases implemented by Ken Clarke in the 1993 Budget following the disaster of Black Wednesday and the UK’s exit from the ERM the rate of ACT was brought down from 25% to 20% so that even basic rate taxpayers would have to pay some tax on share dividends (although by 1997 the basic rate had itself been cut to 23% so the level of tax payable fell to 3%).

Gordon Brown Killed Our Pensions!

OK, being completely fair and balanced he didn’t completely do so, but the two main decisions that together led to the collapse in value and availability of pensions for private sector employees were his. The first, which has resulted in almost all private employer final salary pension schemes closing in the past 14 years, was a change to the rules as to when a business could put more money into its company pension scheme. This was, at least partly correctly, seen as a tax avoidance measure if companies could shield their profits from corporation tax by diverting them into pension funds. Apart from avoiding tax this was also, again, partly correctly, seen as an economically inefficient use of profits when it would be better to reinvest them into  the business itself. The solution was seen to be to change actuarial rules as to how pension fund surpluses were calculated so that it would not be possible for employers to put additional money into pension funds which were in surplus (ie were projected to have more money than needed to pay out the expected level of benefits). This was coupled with tax incentives for businesses investing in research and development so that the businesses would be encouraged into more productive use of profits.

The second policy change was the abolition of ACT in Gordon Brown’s first Budget in 1997 (when the current Shadow Chancellor, Ed Balls was his chief economic adviser). This meant that at a stroke, pension funds lost the “subsidy” of being able to reclaim the 20% corporation tax that had already been deemed to have been paid on the dividend on the shares they held. Brown knew that this would  have an adverse impact on pension funds (see the Evan Davies article linked to above) but that it would also yield around £5bn in additional tax revenues and was part of a broader rebalancing of the relationship between corporation and income tax. It has been estimated that the impact on private sector pension schemes in the ten years from 1997 was around £100-150bn with 120,000 private sector workers losing some or all of the benefits of private final salary pensions in that time.

So, how can private pensions be improved?

One way might be to reverse the changes brought in by Gordon Brown. However, this might not work as businesses might be rather wary of the risk of future changes to the tax system which would remove the benefits of investing in pensions. In the current state of the economy it would also be very odd to take measures which changed incentives away from businesses investing in increasing capacity, taking on employees, or developing new products and towards providing for their employees future needs on retirement. A windfall subsidy to pension funds by reinstituting ACT would also look to be a rather peculiar measure as it would involve making cuts in broader public spending to fund it.

An alternative would be to raise other taxes to pay for this subsidy – perhaps this could be the tenth new use for a Financial Transactions Tax or “Robin Hood Tax” (leaving aside that such a tax would be likely to bite equally on the transactions carried out by pension schemes). Or the top rate of tax could be raised further (I’ve seen suggestions of raising it from 50p to 70p for incomes over £150k) although it is unlikely that this would raise anything like enough and would involve a redistribution from top earners to pension schemes and future private sector pensioners rather than to the many who are finding life difficult today.

I’m not known for being a fan of Gordon Brown’s but I mentioned earlier that his policies which so adversely impacted on private pensions were partly right. He was right in concluding that favouring employers’ pension schemes was a drag on the economy. Investing in pension funds, particularly when they were projected to be in surplus did divert investment away from productive matters and towards benefiting employees at the time when they were no longer being productive as workers. The same applies in respect of public sector workers. Nothing I have written is to diminish the importance of the work being done by many of those in the public sector. The issue is whether it is a better use of the limited resources we now have to provide people with valuable benefits in retirement than to use them in ensuring that the maximum amount possible goes towards todays public services. Businesses have been pushed towards focusing on that balance for 14 years.

Realistically it is hard to see how private pensions could be encouraged by government action now even if it might be feasible to take such measures at some point in the future when the economy is growing strongly. Even if they were to become suddenly heavily unionised it does not look credible that private sector workers could seek to force their employers into investing in new pension provisions by strike action. Even if they did, how could they guarantee that this would not be at the expense of the productive investments in R&D and so on that are needed rather than by cutting profits? Cutting profits would itself depress the value of dividends on those companies’ shares and so harm the performance of the pension schemes that employers would be being encouraged to invest in.

So, while I have some sympathy on an individual level with public sector workers who perceive that through no personal fault they are being unfairly “picked on” to pay more for their pensions, in practice, there is not a more attractive alternative. Nothing can presently be done to help private sector workers to get better pensions and those workers should not be called upon in the circumstances to safeguard public sector pensions which even after the proposed changes would be far more generous than those they could access themselves. As the adverse changes to private pensions were also used in part to fund the expansion in public sector jobs, increases in their pay and to maintain things like the pension arrangements, private sector workers have already been called on to look after their brethren in the public sector first for 14 years.

Perhaps, had private sector pensions not already been raided and killed there would have already had to have been a reckoning on public sector jobs, pay and pensions. It will come as little comfort to the strikers on November 30 but they really have been protected too long.

Politicians’ Politics and People’s Politics

I have blogged a fair bit about politics in the sense of what politicians have been saying or doing on topics of interest but have tended to avoid opining on the business of politics. Largely because, like most people outside the “Westminster Village”, I don’t have any first hand knowledge of what really goes on behind closed doors. Except to the extent that it impacts on what they actually do, the tales of personalities and little personal vendettas of politicians behind the scenes are mainly no different to the gossip about celebrities I haven’t heard of in the tabloids and at best, the subject of entertaining satire like The Thick of It or Yes Minister.

I would say that I’m fairly interested in politics but couldn’t really make much headway with the recent memoirs of Alistair Campbell, Tony Blair or Peter Mandelson. I suspect that I won’t want to read the whole of Alistair Darling’s autobiography. However, the reports about Darling’s book do raise, for me, an interesting question.

What is it that makes politicans who are in a position to point out that a Minister or the Prime Minister are doing harmful and capricious things, running their departments or the country in damaging ways, sit on their hands? Why did Alistair Darling not resign and explain what a horror Brown was, how deluded he was about the scale of the economic crisis and the responses to it – or why did David Miliband not take the opportunity to challenge Brown after meeting Darling and hearing his opinion that they were being led the wrong way towards defeat? Why did Tony Blair not simply sack Brown at the first instance of rebellion or at least ahead of the 2005 General Election?

Is it simply that ultimately politicians are concerned first of all about retaining their position of power? That politics, once one has become an MP, is all about remaining an MP, getting noticed by your Party leadership and progressing to shadow or ministerial posts of influence then doing whatever you can to ensure that whatever is happening you become the government and stay that way? So, unity is better than defeat in the cause of one’s beliefs? Better to feel, as Blair apparently did, that he had an angry and antagonistic ball and chain around his ankles but to be hobbling around Number 10 with it than to be free and risk being anywhere else. Better for Darling to be bullied and sidelined for two of the most stressful and momentous years for any Chancellor than to risk either bringing the government down or simmering on the backbenches as Ed Balls got the job he apparently wanted?

We are all to an extent cowardly and ready to do things for a quiet life but there are enough ordinary people who have risked their entire livelihoods by walking out of jobs and claiming constructive dismissal when things become intolerable at work to put it down to that. Wanting a quiet life is surely the opposite of what takes most people into the bearpit of public life.

Perhaps in the end it is more about pure tribalism. Better to hate being a key member of the winning team than to be any form of a loser. If that is a fair assessment of the mindset of politicians, forget their dodgy expenses claims, this is the real sign of a lack of honour in the “Honourable” ladies and gentlemen. It means that politics, as experienced by the people who do it purportedly on our behalf, is nothing at all about us and all about them.

I hope that the high level of “rebellion” from many of the 2010 intake of MPs from all parties is a sign of change in the future. The fact that the path to promotion is more difficult for Conservative backbenchers than for their Labour counterparts in 1997 may free them from trying too hard to keep their noses clean. The fact that many of their voters considered entering a coalition with the Tories to be a betrayal may mean that LibDem backbenchers will concentrate on being sufficiently disloyal to the government they nominally support to preserve their chances of re-election in 2015.  I hope that the existence of an internal opposition to the government in the form of a coalition where it is implicit that policies have to be fought out internally between the Conservatives and LibDems at least to some extent make it somewhat less likely that Ministers will focus first on keeping the present government intact at all costs. But, I’m not sure whether all that might not be overoptimistic. We may just see a different and even more opaque set of ways in which MPs will continue to play politics rather than do politics for their constituents.