Thursday, 4 October 2012

One Nation. Same old Groove

Set-piece speeches and televised debates are about style not substance, aimed at reinforcing the morale of your supporters rather than converting your opponents or persuading the undecided. If you want an inkling as to policy, you'd do better to look at the margins. On the day that Ed Miliband attempted to re-mint the vapid "one nation" phrase, Yvette Cooper announced that a future Labour government would abolish the Independent Police Complaints Commission and replace it with a more "robust" Police Standards Authority. The justification for this upgrade was to address the IPCC's multiple failures in respect of Hillsborough, Ian Tomlinson and phone-hacking. Only a pedant (like me) would note that the IPCC was only established a decade ago, so can't really be held accountable for the Hillsborough cover-up, or that reform of the police might be more appropriate than turbo-charging the watchdog.

Coincidentally, we also heard the Government's admission of failure in respect of the West Coat rail franchise bid. The Tory response to this is an independent inquiry to be conducted by three business "leaders". Perhaps they'll recommend higher pay for civil servants, as advocated by Gus O'Donnell, former civil servant number one, or maybe a further hollowing-out with PwC taking over procurement. I know which one my money's on. Margaret Hodge, chair of the Commons Public Accounts Committee, made an interesting comment when she said: "People came into the civil service in the past because they were interested in policy, they wanted to devise policy. Today, the job of a civil servant is much more about delivering programmes, and that requires a different set of skills." You can just about hear the peevishness of a politician towards Sir Humphrey, balanced with admiration for the public service ethos, in the first sentence, but the second is pure neoliberalism. "Delivering programmes" in this context means acting as middlemen between government and business. It appears to have escaped Margaret's notice that civil servants had extensive experience of delivering programmes back in the days of British Rail. Perhaps she missed the recent documentary on the highly-successful Intercity 125, or perhaps she just blanked it out due to the heavy presence of a gurning Jimmy Saville, assuring us that this was the age of the train.

Privatisation has resulted in the role of many parts of the Civil Service being reduced to procurement and regulatory oversight (i.e. supplier management with knobs on). The former has led to the revolving door with corporate suppliers, which is the root of O'Donnell's bleat about pay (buying a former civil servant responsible for procurement is a very cheap way of de-risking your bid). It has also made the service vulnerable to corruption, not just in the sense of bribes to favour some suppliers, but in the equally pernicious sense of finagling the bid process to achieve a pre-determined outcome. As anyone who has been involved in a commercial bid knows, it is rare that soft criteria and risks can't be engineered to produce the desired result. This is not necessarily a bad thing, as there are intangibles and factors, like relationships and intellectual capital, that cannot easily be priced (things that money can't buy, as Michael Sandel would say). The suspicion is that the Department for Transport had taken against Beardy, though the briefing that this was a prejudice on the part of civil servants alone, and that the politicians were entirely blameless, strains credibility.

Both Labour and the Tories have bought into the neoliberal notion of the regulatory state: a core of business-savvy public servants, under the watchful eye of ministers, doling out public money to private contractors. For Labour the state can be a powerful agent on behalf of the buying public, ensuring best value and insisting on ethical practice. For the Tories the state, particularly in the narrow form of the Civil Service, is a necessary evil that exists to ensure propriety in the negotiations between large corporate concerns and the holders of the public purse. The one a go-between, the other a chaperone. In practice, the two roles tend to merge, as they are simply two facets of the same neoliberal construct, hence Hodge's easy substitution of the public service ethos by technocratic management. Leaving aside the vanity of small differences, it indicates that Labour has yet to seriously challenge the shibboleth of privatisation, even in respect of a natural monopoly.

Meanwhile, back in Manchester, Labour propose to fund the growing costs of social care through means-testing, which shows that the incremental retreat from universal benefits has momentum yet. Just as corporate interests won't be challenged too hard, beyond crowd-pleasing insults about "predatory capitalism", so wealth (property and unearned income) won't be taxed too hard. It's pretty obvious that wealth taxes of some sort are coming, not just because of the short-term needs of deficit reduction but because of the longer-term decline of labour versus capital in national income. Some commentators are sceptical as to whether this decline is real, pointing to the increasing practice of recategorising wage income as capital (e.g. personal services companies, share options and the whole private equity scam), however the criticism is misplaced. The point is not whether the income is correctly categorised by economists, but whether it is optimally taxed by governments. One of the features of neoliberalism has been the privileging of investment income, such as capital gains and dividends, over wage income in terms of lower tax rates. This has tended to be obscured by the headline-grabbing shift from direct income tax to indirect taxes such as VAT. As top income tax rates have progressively dropped to noisy fanfares, effective tax rates on unearned income have quietly dropped as well.

There are sound arguments as to why capital should be taxed less than income, but they assume virtuous investors and productive investments. The reality is that these taxes overwhelmingly benefit unproductive assets, such as housing (a house is consumption, a factory is production), and financial engineering, including asset-stripping, leveraged buyouts and hedge funds. One can argue that the neoliberal hegemony was brought about by the extension of capital into the majority of people's lives through mortgages, privatisation (facilitated by the myth of popular share ownership), and private pensions (dependent on shares and annuities). This in turn has wedded us to the idea that growth, and therefore capital accumulation and asset appreciation, is necessary come hell or high water.

The political challenge is that cutting public expenditure will not be sufficient to meet future needs. The famous "demographic timebomb" not only means more oldies to pay for, it means proportionately fewer people paying income tax, regardless of the level of unemployment. Even unchecked immigration won't make up the balance. The bottom line is that tax revenues have to shift from labour income towards wealth in the near future, which is why all parties are now testing the water. Some forms of wealth tax will remain politically toxic, such as revaluing council tax to reflect high property prices, and we will no doubt be distracted by tokenistic nonsense such as the mansion tax. Dividends are unlikely to be touched as this would produce too many stories in the media about old ladies surviving on the thin gruel of some long-held shares, though there is a sound argument for introducing a dividend super-tax for old ladies such as Michael Green's missus. On a positive note, the time of the land value tax may well have come, judging by the growing consensus across the party spectrum.

The one area I think all the parties will be cautious over is capital gains tax. This is the key tax break of neoliberalism. Huge amounts of wealth have been diverted to the corporate class through the favourable treatment of share options and CGT, incidentally feeding the boom in IPOs, management buyouts, and M&A that powered the City since the 1980s. It also led to a shift in shareholder expectations from dividend income to share gains, which in turn meant a weakening of corporate governance as investors became increasingly short-term and management increasingly under pressure to deliver share price growth. The coalition government has talked about bringing CGT in line with income tax rates, though with exemptions for "entrepreneurs", but sounds windy about applying this to second homes and buy-to-let properties.

In fact, there is no sound argument as to why primary homes should be exempt from CGT, as they are today. Given that these gains are "unearned", i.e. they're due to house price inflation, not your exquisite taste in decorating, there is a moral as well as an economic argument that they should be taxed at a high rate. The chief argument against taxing land or property is illiquidity, i.e. you may own the asset but you may not have ready cash to pay an annual tax bill (though an LVT is likely to be relatively small beer for house-holders as they own a tiny amount of land compared to, say, the Prince of Wales), but this argument disappears for a tax that is only levied on realised gains when you sell a house. The political problem is that thirty years of propaganda about the virtues of property ownership, and the increasing dependence on property values in lieu of pensions, mean that no party would want to take credit for bringing about such a change. Ironically, the best time to introduce CGT on primary homes would be immediately after a price crash, so an opportunity may yet arise.

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