I always knew the former Chancellor was no good at economics. Whilst most people were busily repeating Labour spin about his genius at running the economy, I was critical of the way he trashed the Bank of England and taxed the pension funds to death at the beginning, disagreed with the huge surge of public spending, borrowing and credit in the middle, and disliked the stealth taxes, the nationalisation of Northern Rock and endless changes to the figures that followed. He is now reaping what he sowed. Far from having the best placed economy to handle the downturn we have one of the weakest.
I did always think, however, he was a very shrewd politician. He after all was a colossus in a party of minnows – so much so that none of the pygmies around him dared to offer their party a choice when he finally saw off Blair. Gordon Brown was in many ways the arch spinner of the Blair era, and the Brown era was ushered in with a welter of new spin. So confident was the new regime that they even spun that they did not spin, knowing that spin had been discredited. The endless rows and disputes of the Blair/Brown years ended with the departure of Blair. It looked as if the new era would be one of iron discipline and message control.
The last few days show a complete breakdown in political discipline. Miliband’s recipe for a better government was bound to be seen as a leadership bid by a media hungry to take the leadership story on. Journalists are clearly being fed many stories by Labour MPs and briefers about leadership uncertainty. Harriet Harman’s people must have briefed she would be the first woman in Number 10 since Margaret Thatcher, in charge for a week of Gordon’s holidays. That too was bound to lead to unhelpful speculation, and looked bizarre when someone counter briefed that the PM himself was still in charge from the beach. Friends of Jack Straw have been busy denying he is putting himself about at this sensitive time. We read that maybe 10 junior Minsiters are ready to resign to destabilise things further, and that Alan Johnson is wanted to help put the “message” across. You would need to be some snakeoil salesman to sell to the public the current toxic mix of higher taxes,more public waste, higher borrowing, and a sharp squeeze on everyone’s income to pay for some of the public excess.
Last year an eager Prime Minister used the first excuse to return to mind the shop, cancelling the holiday. He could easily have spared more time away. This year he has been persuaded to take three weeks off. That is a very long time in the hothouse atmosphere his colleagues are creating. There is the danger that the political “narrative” as Labour like to call it will have been wrenched so far away from the one the PM wants by the time he does get back that it will be difficult for him to turn it around. Last year he took too short a holiday. This year he may end up taking too long a holiday.
As there are phones in Southwold he would be well advised to use them to get a grip. He needs to assert his authority over Miliband, Harman, Johnson and the rest as quickly as possible. He needs to supply some sense of direction to the country as awell as to his party.
July 30, 2008
Dear John
I am going to defend a portion of Gordon’s record. Now don’t get me wrong, I think that he is’nt much of an economist, but I can defend bits of the record. I would be interested in your take on the following points –
Firstly, BoE operational independence was not a bad thing, although I think the inflation target might have been made tighter and consideration given to the question of asset price inflation (difficult topic). I do agree that the tripartite system of financial regulation was a mess and this could have been foreseen, not least from the problems in Japan during the late 90s. (Squabbling FSA, BoJ, MoF, LDP).
Secondly, I am not convinced that the taxation of dividends paid to pension funds was a bad idea. Any income that is tax sheltered relative to other income will tend to create distortions. So pension funds might have been used to shelter some income that would otherwise have been paid as regular remuneration. This has hastened the end of the defined benefit pension scheme, which in my view was probably desirable – the best description of DB pension funds I have ever heard was “a massively levered hedge fund off balance sheet.” They really are that. Now, we can get into arguments of whether double taxation of dividends is sensible and the desirability of longer term investment capital (pension funds) and the desirability of allowing some firms to pay out dividends (to avoid the Jensen free cashflow problem) and thus the need for a tax free clientele. But, the great pension robbery is a debatable area.
Now what he spent it on. There we can agree. It was bad. Gordon did well in his first term by sticking to the previous Tory spending plans, but on his own, he was lost. He did keep the UK out of recession by the splurge in 2001, but it was on far too many public sector jobs of dubious worth. I also agree fully with the political part of the analysis. I do hope he manages to get a grip, so that he can get what he so richly deserves at the next election.
Reply: the outcome of his pension changes – tax and regulaiton – was the closure or wind up of many final salary schemes, and the outcome of his removal of fucntions from the Bank was incompetence in the money markets leading to the collapse of Northern Rock.
July 30, 2008
It’s not just Gordon who needs to supply a sense of direction. The entire party has lost its way now that the New Labour project has been shown to be nothing more than some vacuous PR and a scattering of policies that have since been largely dismantled by Brown.
http://lettersfromatory.wordpress.com
July 30, 2008
it would be interesting to see what would happen to harriet (harman)'s profile if our country were to suffer some crisis while she is at the helm? there are clearly sections of the media trying to beef up harman's credentials. gordon brown may well feel that he already suffers usurpation from harman. this should surprise no-one. the new labour project has always been a breeding ground for career-politicians and … opportunism.
July 30, 2008
Ken – two things.
Firstly, the point of a pension fund isn't that income is tax sheltered – it's that tax isn't paid until it is actually taken as income. After all, we don't tax profits that are re-invested in a business, we only tax the (hopefully extra) profits that are later taken as a result of that investment.
Secondly, I agree that defined benefit pensions were not a good idea as the liability can't be defined and it is better if employers, in particular, can define their commitment at the time. However, the tax raid affected companies and pensioners that already had funds invested and commitments under the previous tax regime – they had no way out other than to put a whole lot more money in to make up the shortfall caused by the extra tax. You also forget that the tax raid affected ALL pensions that were in any way funded – including the defined contribution (money purchase) schemes thus making it much more difficult for people to save for their retirement. I invested money in good faith in such a scheme – which I now can't get out – and it is being taxed in a way that was not expected when I put it in. Only unfunded (i.e. public sector) schemes are unaffected.
July 30, 2008
HJ
The point of my analysis is that pension funds were tax sheltered. Let's imagine that an individual can take income that will be saved as either income or a pension payment. Let us assume that he would be taxed on the income or the eventual pension payment equally (eg income tax rates dont change and the pension payment when it arises is of a similar magnitude to the original payment allowing for inflation etc.) The major difference between taking the money as income and investing it and taking it as a pension payment then becomes the tax free nature of dividends for the pension pot. This is a distortion in the incentives between income and pension payments.
The grab was on the portion of company earnings that was paid out as dividends. Your point about firm reinvestment is akin to the question of whether we want to encourage longer term investment funds via pension funds, but one should be aware that the distortion is being created and I am not certain that we need to enhance the attractiveness of pensions beyond the income smoothing effect that it already represents.
I do take your point about the impact on existing pension schemes, and it is an area that I think Gordon didnt really consider very seriously before grabbing the money, and he compounded the situation with FRS 17.
I think one issue is that if Gordon had engaged in a revenue neutral action, such as reducing the corporate tax rate to match the rise in tax from the abolition of the pension tax credit, you would see the basic removal of the pension tax credit as being a good technical change in removing a tax distortion. But he spent the money badly.
July 30, 2008
Brown is the worst type of party politician. All his decisions are framed on seeking party political advantage not what is best for the country. We desperately need a general election to begin the painful process of sorting out the complete mess this government has made in every aspect of government policy. You and your party will have a heavy burden to sort out this mess.
Regarding Ken's comments, he clearly wasn't one of those affected by Brown's pension fund raid which has cost millions of people massive amounts in reduced pensions to which they had contributed their own money for many years.
July 30, 2008
The longer Miliband & Harmen in particular spin about what great leaders they would be the more obvious it is that Gordon is indeed far & away the tallest among pygmies. Miliband, with his commitment to making fighting global warming a populist issue & Harmen with the same commitment to fighting men would ensure electoral meltdown.
July 30, 2008
Mr Redwood, I think you ought to give more consideration to Ken's comment above, namely:
#This has hastened the end of the defined benefit pension scheme, which in my view was probably desirable – the best description of DB pension funds I have ever heard was “a massively levered hedge fund off balance sheet.â€# [Ken]
DB schemes might be sustainable in high-capital/low-labour industries but they are a danger to firms in industries where the mix goes the other way for precisely the reason Ken implies by his reported, but accurate, description. The danger isn't noticeable when the workforce is young and the fund is new, but as it matures the liabilities become massive, not just in absolute terms but more importantly in relation to the capital base of the firm. Much as everyone would like to be a member of a nice DB scheme to ensure a comfortable retirement the chances are in the long term that they they will ensure nothing of the sort with many having to be wound up carrying huge deficits.
Like it or not, for the nation as a whole the only sensible route is for a predominance of defined-contribution schemes and, if one must, defined-benefit schemes with limited guarantees not based on FINAL salary (but at most indexed career-averaged, perhaps), or some mix of these two.
Naturally, this should also apply to the public sector but with even stricter controls on any guarantees. It would also give the sector's employees an interest in the health of the economy which often seems to be the furthest thing on their minds.
Of course, selling such realism to an infantile public will be no easy task. But it's what any honest and decent politician ought to do. I wouldn't like to be is his shoes though.
A tricky one.
P.S. (TO BE DELETED? Probably.)
Was there perhaps too much realism in the post I submitted on your house-prices thread yesterday? I can understand that. 🙂 Will politicians ever openly discuss the fundamentals of democracy? "But it's all only about elections, innit?" OK. I don't expect a reply, or for you NOT to delete this postscript. As I say, I DO understand. It would probably be wreckless for a career politician, even a good one, to bring these things up. For now. The unhappy time will come though.
Reply: There is a case to be made about risk on the lines of your argument, but the final salary schemes were stable and affordable before the tax and regulatory changes.
If you would like to develop the argument about housing supply and migration I think there are useful things to be said, but I did not think on a quick reading that you said it convincingly in a way which would help the debate.
July 30, 2008
Gordon should now drop his Arnold Schwarzenegger smile and bring down the great clunking fist on Milliband and Co. He has a golden opportunity to shed his image as a ‘ditherer’ by terminating the ministerial careers of the lead conspirators.
July 30, 2008
Mr. Redwood, Thank you for the reply, on both counts.
But let's just stay with pensions for the time being. 🙂
You say "the final salary schemes were stable and affordable before the tax and regulatory changes."
Well, yes and no. The tax changes should not have been made (and let's not forget who put us on that slippery slope to begin with). Apart from anything else, they amount to double taxation as I think one contributor above has already mentioned.
With regard to regulatory framework, it's a bit of a tricky one. There are a number of issues. But's let's just take a couple.
First, it is very hard to argue against the vesting and preservation rights that have been introduced since the 1970s and I would not want to anyway. I believe them to be just as I regard accrued pensions as deferred pay. Prior to the introduction of these rights, however, and during the period they were gradually strengthened (to the right level too in my view) there was plenty of opportunity for long-staying employees to effectively but indirectly 'feed off the backs' of early leavers. This was done by the so-named surpluses the early leavers generated on their departure. In fact, the 'Executive' sections of many schemes did rather well indeed out of this. I have to say that these forced 'handouts', from the lower-paid generally, deeply offended my sense of fair play. (Just in case that last comment might have aroused some understandable suspicions, I should say here that I am no socialist—indeed I am far from being so, to put it mildly. But they are not the only people to possess a heart, or so they tell us, incessantly. 🙂 )
Then there are the (restriction of) surplus regulations (effectively another tax grab). The politicos scored 10 out of 10 on the dumb test for that one. If one is going to run a DB scheme then in times of plenty it makes very good sense to build up surpluses from the happy windfalls around. They will be needed during the inevitable hard times of the business cycle to come.
But even if there were no such surplus regulations the underlying dynamics of DB schemes in toto is still there. When you say these schemes were stable and affordable I would agree, but with one important proviso. The stability and affordability was there but only if one restricted one's view to the relatively short term, say something like no more than 10 or 15 years. The period of stability and affordabilty you are talking about was unsusual. It was as a time when very many schemes were newly established and thus a time when the magnitude of the funds involved was relatively small and when the dangers of the potential for, let's call it, adverse pension-contribution gearing on companies' earnings was way over the horizon for most observers.
In the long term, however, as the majority of DB schemes reach, or have reached, the hoped for steady-state maturity (and beyond, for declining industries) their full financial dynamics would become all too apparent, whatever the tax and regulatory framework — unless, of course, one would wish to return to 'stiffing' early leavers to help get by. No, I didn't think so. 🙂
I would love to be able to believe in Father Christmas and DB schemes' long-term viability but I don't think either would be wise.
It's a bummer being an adult.
Best wishes.
Reply: the bon merry go round which I have described and criticised in the past on this site is an important part of the destruction of the final salary funds, alongside the tax changes.
July 30, 2008
Harriet Harman is someone who just does not get the Internet at all. First of all, choosing her password from her very own name was not that clever. Now, of course, we get this most excellent site: http://harrietharman.blogspot.com/
Please look – it is fantastic!
About the pensions – wasn't there some huge Brown tax that sunk the boat? Or have I got that wrong? I seem to remember that the pension system was one of the best in the world under the late lamented John Major.
Excellent article in the Telegraph bout the future of Labour. What, exactly is it for?
It most certainly is not for the vast nineteenth century flat capped whippet rearing working class – which finally died off in the 1980s under Mrs Thatcher.
Does it represent the unwaged, the tragically incapacitated on sticks, (who apparently outnumber the wounded of 1916), and the vast army of civil serfs who feed and support them? (Not according to the people of Glasgow East).
Or does it represent career politicians whose only aim is to keep their wages coming in?
The Labour Party is in a real danger of melt down. The Conservatives were once in this position, but they really do stand for something: – decency, hard work with rewards, fair play for everyone, a sense of history (remember the blog list you gave us of our favourite blogs?) and a deep respect for the individual, whatever class/race/religion he or she comes from.
It is now too late for Mr Brown to get a grip: the game is up.
July 30, 2008
I have to declare an interest here, I am the recipient of a defined benefit pension from a privatised state sector industry. I was an "early leaver" who was given free extra years to give me a full pension at the age of 50 (my business unit was closed down by the new "did-not-have-a-clue", macho management. I joined the company pension fund at the age of 18; the best thing I ever did.
I agree, the defined benefit pension funds were/are a hedge fund. For every pound I was putting in the pension fund, the company was putting in two pounds, the funds liabilities calculation were pure fiction. In the days when the fund was swimming in cash, they re-payed to the company and the members of the pension fund. The employees contributions dropped to half of our previous, to about 3.5% of salary. Then they changed the rules; FRS17 turned up, after I had left fortunately.
My bit of the DB fund has now been closed to new members. Understandable, because the numbers just did not add up. The scheme actuaries were working on ten year old mortality stats, and the bloody pensioners were not complying with the stats; bastards.
My recent experience with Local government is even worse. My Council had a deficit in its share of a public sector "funded" scheme, of five years worth of Council Tax. It currently pays £3 for every £1 the employee pays. It pays another 60 pence on top of that for early retirements.
Local government employees, plan to be out by the age of 55, particularly Teachers. Being "stressed out" is good enough for an early exit. Naturally, they get jobs as Supply Teachers – no marking; no lesson planning – the week after they leave; their Supply pay rate is linked to the rate they were on before they left.
Even worse are the unfunded public sector schemes. A female police officer should be paying about 55% of salary into her "virtual" unfunded scheme; split between she and her police authority. Not even close at present.
Worst of all, the MPs pension fund. Nothing even comes close to this; even by profligate public sector standards – sorry John but it has to be said.
Would we be having this debate if tax rates were lower; who knows. Should the Conservatives be spelling out what they would do when in government; probably not yet. What they should be doing is spreading the doom and gloom. Pushing the dire state of the economy. Announcing that they are setting up commissions to establish the nations debts. Commissions to work out the cost of failing New Labour initiatives and regulations. There is a wealth of New Labour failure to be exposed. When they and the BBC ask how you will fix it, ignore them and move on to the next failure. There is a limit to what the media can handle in a day. Give them a Tsunami of gloom.
Reply: The MP pension scheme is not the worst or dearest for the taxpayer- it is funded, not unfunded, and we contribute from salary.
July 31, 2008
I will leave it to Redwoodians to make their own judgement on my comment.
See the following;
http://money.uk.msn.com/guides/salarycentre/artic…
Then have a look at this one. In the para that mentions the number of members in the PCPF, there are "… 176 former MPs working elsewhere …". Now, who do you think they might be? Where are they now; and, which other taxpayer funded pension fund are they in now. HMRC sets limits on what you can put in a pension fund before tax; getting my drift?
http://www.efinancialnews.com/assetmanagement/ind…
July 30, 2008
John, if you were in your 20's would you emigrate? Given that:
– UK oil and gas are running out. Coal is not longer utilised.
– France generates 70% of its electricity from nuclear power – 20% UK
– France has over 100 days of gas stores – 20 days UK
– France is self sufficient in high quality food. UK imports food.
– France – and Germany – still have a manufacturing/tech sector. UK has finance, shopping and selling houses to each other at vastley inflated prices.
Reply: No I would not. The UK was in a mess when I was in my twenties – with a Labour government. I stayed and fought for change.