“A New Deal for the City: Liberal Democrat Proposals” reviewed

Nick Clegg’s speech to the LibDem City Forum was sufficiently interesting to make the BBC news homepage. Nick acknowledged that Vince wrote it – a deserved tribute to Vince’s credibility. Nick highlighted David Laws, Chris Huhne, and Susan Kramer as evidence that we have “the strongest team of economic expertise in British politics today”. True, but why are none in economic portfolios?!

Here are some of the proposals.

The good

1. The depositor protection system doesn’t work – as the Northern Rock queues show. It needs reforming – although Nick didn’t say how.

2. Bank charges should be transparent. Yes! But what about government charges? Prescription costs are far higher than the medicine cost in almost all cases…

3. Make it harder for banks to repossess houses.

4. Return the capital gains tax system to how it was in 1997, before Labour messed it up.

5. Non-doms limited to 7 years, before being taxed like the rest of us, just as in pretty much every other country.

6. All market participants to reveal positions, making it easier for the market to understand who it doing what – and particularly, who is shorting the market.

The bad

1. “There are minimal benefits to provincial Britain of this growing concentration of economic activity in London”. This is not true: as Nick acknowledges, almost a quarter of income tax revenues (with similar proportions for some other taxes) come from City of London employees. Put simply, many of Middlesbrough’s schools are paid for by London bankers.

2. “There is a strong case too for disconnecting retail banks and investment banks as occurred in the USA”. This is bizarre as the US banking system is in trouble, and because the only UK bank to need bailing out (Northern Rock) was a retail only bank.

3. Including “asset prices, and specifically house prices” in the definition of inflation. It would be very odd to include share prices in inflation – M&S recovery share price rise was not inflation. Including house prices is problematic for two reasons. First, £100,000 at 5% is smaller than £100,000 at 10%, so including the price without consideration of the rate gives a distorted picture. Second, if we done this since 1997, then interest rates would have been higher to cool the housing market. Higher interest rates (and remember ours are already higher on average than in the US, Europe and Japan) reduces investment, raises the value of the pound, cuts exports, and increases unemployment. Still convinced that you want to include house prices in the measure of inflation? Thought not. We should sort the housing market properly, not by some financial quick-fix.

The ineffective

1. Nick think that governments routinely bail out banks. Only one (Northern Rock) has been bailed out, and even there government exposure is limited. In all other cases banks in trouble do exactly what Nick wants them to do: hold a (discounted) rights issue. Shareholders are forced to bail out the bank. That is what they are for – taking profits in good times, and losing out in bad. The Royal Bank of Scotland asked shareholders for £12bn, while Halifax Bank of Scotland requested £4bn. The current system is pretty close to working as it should do.

2. Nick wants counter cyclical capital adequacy rules so that banks hold more capital in booms and less in slumps. There have been lots of calls for this recently, but it may be unnecessary if banks successfully hold rights issues when they need more capital.

3. Nick expressed concern that the City has few spillovers into poor neighbouring Boroughs, such as Tower Hamlets, but offered no policies to change this. In reality, the best way to tackle this is my raising education standards and expectations in underperforming areas – as our pupil premium is designed to do.

4. Shareholders to approve executive pay. Either this will be ineffective, or if it cuts pay it will lead to more private equity, which has no shareholders.

5. Greater provision of generic financial advice. The person taking out too much debt is unlikely to discuss finance with a well-meaning person first.

6. “Newly emerging financial participants – whether it be in Hedge Funds or Private Equity – need to demonstrate that they accept the responsibilities which go with their growing influence” – what does that mean in practice?

Overall a good speech, with real substance worth discussing.

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15 Comments

  • “Nick highlighted David Laws, Chris Huhne, and Susan Kramer as evidence that we have “the strongest team of economic expertise in British politics today”. True, but why are none in economic portfolios?!”

    You shouldn’t underestimate Vince Cable’s economic expertise, and he is in an economic portfolio. And I think that at least David Laws has been able to use his expertise also in his current portfolio.

  • I see Jame Graham was quicker than I was. 🙂

  • Seriously tripe article. No more. Please.

  • Making it harder for banks to repossess houses (and flats) would be welcome, on balance.

    It would shield individuals and families from the worst effects of economic misfortune. On the negative side, it would undoubtedly increase the cost of borrowing. But again on the plus side, it might also reduce the incidence of irresponsible lending.

    Repossessed families often have to be housed at public expense, remember. I would much prefer to see the loss lie with mortgage lenders (albeit briefly) than land on the public purse.

    It would be possible to give the courts the power to postpone sale for, say, up to five years. That would require an amendment to TOLATA 1996. Also the Insolvency Act would require amendment to stop banks using bankruptcy as a backdoor way of recovering their investment.

    The last time the state tried to force businesses to relocate to the regions was during the 1964-70 Labour government. Anyone old enough to remember George Brown and his “Location of Offices Bureau”? The lasting memorial to this Canutist exercise is the forest of office buildings disfiguring Croydon’s skyline.

  • Hywel Morgan 13th May '08 - 1:55pm

    “Repossessed families often have to be housed at public expense, remember.”

    Technically – however if the situation is over-extended borrowing then they will still be in a position to pay rent – as opposed to a 1990s scenario of reposession following unemployment.

    The problem is as you identify. MOrtgage borrowing is comparatively cheap because it is secured by property – if you reduce that securitisation the risk is higher hence borrowing costs will rise.

    It’s easy to say the banks are to blame for lending irresponsibly – but anyone taking on a 110% mortgage of 4-5 times their salary has to take some responsibility for the consequences of their actions.

  • Andrew Duffield 13th May '08 - 2:22pm

    “Put simply, many of Middlesbrough’s schools are paid for by London bankers.”

    Put simply Tim, the reverse is true. London’s bankers are infact subsidised by the vast majority of Middlesbrough and other provincial residents who pay taxes and rent their homes. A wunch of bankers pays far less in tax than they gain, unearned, from their ownership of valuable properties in the South East (not to mention those second and third homes in the provinces).

    Capital continues to flow from the poor to the rich, as the growing wealth gap proves. The north subsidises the south.

  • David Heigham 13th May '08 - 5:57pm

    This speech which Vince wrote and Nick spoke is very impressive. The picture it gives is of a party that has got a grip on the issues of financial and City policy that is not equalled in the UK nor elsewhere in the world. All those intersted should read the speech and not just read the comment.

    The wording of the speech is, to my eye, guarded at all the right points. It appears that Tim Leunig does not always see why the language of the speech is as it is, nor that on many points the speech suggests ways that policy might go, rather than prescribing ready made “solutions” in the way that New Labour is prone to. However, I am very grateful to Tim for making us look at this speech.

  • Paul Reynolds 6th Jun '08 - 9:00am

    To Tim Leunig

    Well set out article. Thank you.

    Still it shows that our policy process is still unprofessional and in need of reform. Policy should be less glib and better worked through, and tested for ‘downsides’ with relevant experts.

    In the end the tax-induced bias to investment in house ownership will have to be addressed. If not us then by others.

    If I get a capital gain on investment in shares or other securities, I pay a hefty tax. If I get a capital gain on my residential property, after costs, then it is tax free. Put this together with draconian and ineffective planning laws for residential property – houses and apartments – which prevent the rate of new dwellings catching up with population growth (much of it not picked up by the stats, as Nick Clegg has pointed out) then you have a permanent propensity towards a housing boom. But maybe the Lib Dems are a tad too populist to address these longer term structural economic problems. Paul

  • “Put simply, many of Middlesbrough’s schools are paid for by London bankers.”

    This may be true in real terms, but the reverse is true in relative terms: this imbalance is a consequence of centralisation and it is unhealthy.

    As your doctor will tell you, unhealthy behaviour is unsustainable over extended periods of time.

    What I find interesting and widely ignored is the floundering potential of rural areas due to infrastructural and transport weaknesses, undervalued by an estimated £300bn/year!

  • Paul – both LDs and Tories endorsed the planning reforms I suggested in my recent centreforum paper (go to their site and enter Leunig in the search box). This would be a liberal, localist, structural solution to a big structural problem. We can be bold, sometimes!

  • Paul Reynolds 7th Jun '08 - 4:02pm

    Thanks Tim. Noted Re planning reforms. The bigger issue however – probably – is the need to make taxation much more neutral between different forms of savings/investment, and remove the wildly biased regime which favours investment in residential property. This is the key issue to which my populist comments refers, more than the planning system. Thanks. Paul

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