Why can’t the public sector offer incentives, cash back and encouragement, instead of relying on fines, penalties and prosecutions?

 

 If you buy something from the private sector, you benefit from the mantra that the customer is always right. If you are forced to buy something from the public sector, you are usually under the mantra that the supplier is always right.

         If you buy a planning permission you are put under threat to get everything right and follow the rules. If you park in a Council car park you have to study the rules and end up with a fine or a wheel clamp if you make a mistake.When you have to pay your taxes you are expected to be master of the infinite complexity of modern tax laws, or else face a penalty payment.

        Wouldn’t it be better if the public sector used encouragement more and enforcement less? Wouldn’t it be a good idea to offer people money back if they do not need to use certain public services? If , for example, you went the last year without borrowing a library book, shouldn’t you get a rebate on your Council tax for libraries? If you do not use the local Council’s leisure facilities, isn’t that worth a thank you in the form of a discount on your next tax bill? If you are a regular user of a Council car park which is not normally full shouldn’t you get a bulk discount on the daily tariff?

        The public sector is not good at managing demand. That’s why it resorts to queues, inconvenience for users, high charges and poor estimates of what is and what is not needed by communities. Do you have good local examples of services that are not needed, or services which are wrongly priced?

Mr Redwood’s speech on the Financial Services (Banking Reform) Bill, 8 July

Mr John Redwood (Wokingham) (Con): I remind the House that I provide investment advice on world markets and world economies, but I am pleased to say that it has nothing to do with banking credit or banking leverage, so I feel quite entitled to comment in this important debate.

I welcome what I hope is a probing new clause from the Opposition. It allows us to discuss something that is at the heart of what regulators need to do to have a strong banking sector and economy and to have the comfort at night of knowing that we will not live through another dreadful crisis like the credit crunch of the previous decade. The new clause goes to the heart of the issue: what action should the Government and regulators take to try to ensure that large banks and other institutions advancing credit that can be a risk to the whole system are kept under sensible control, so that we can be pretty confident that, if something goes wrong or the world economy dips, they have the necessary money to pay the bills and deal with any losses that might arise?

If we look at the tragic history of the previous decade, we can see that the then banking regulator in the United Kingdom—I think that it has now admitted this—got it wrong both ways. It wanted the banks to have too little capital, cash and protection, and in the run-up to the credit crisis in 2008 it allowed the most enormous expansion of leverage, which previous generations of regulators had not permitted. Then, in the ensuing panic, when interest rates had to rise to tackle the problem of inflation, it lurched to wanting very high amounts of capital, but at the time the banks could not generate profit and so found that very difficult.

That resulted in the previous Government’s decision, in two of the worst cases, that capital should be forthcoming from the state and taxpayers themselves. I think that we all agree that we do not want to go back around that course or to get to the position again where some Members of this House feel that the only option is for the state to provide taxpayer support for organisations that have been too leveraged.

New clause 9 suggests that it is possible to set a leverage ratio for the system as a whole, and it might be, and that might be desirable, and I look forward to the Minister’s response. Of course, the regulator already does that in a way because it sets individual target ratios or capital requirements for all the major banks in the system, so if we aggregate those we get to its view of the aggregate amount of leverage. As the hon. Member for Nottingham East (Chris Leslie) has rightly said, if that overall leverage were to be set for the system as a whole, the regulator would still need to interpret that bank by bank. Some banks would be super-prudent and some would be straining at the other end of the spectrum and might be under special measures with the regulator to try to get their balance sheets into shape.

My particular worry at the moment is that it is never easy managing the transition. We would all be delighted to wake up tomorrow and discover that all the banks are super-safe, but if the price of getting to that stage too quickly is no growth in the economy or, worse still, the onset of another recession because the banks cannot finance the recovery, that would be a bad idea. Many of us would like to see the banks get to better ratios by writing more profitable business and generating more legitimate and sensible levels of profit, rather than having the regulator run the risk of moving too quickly to demand that they have much better ratios. The banks would then have to achieve those better ratios by not writing any new business and by trying to get old loans back ever more quickly from businesses that might find it difficult to repay them. Some of those banks, not being very profitable, could not trade themselves out of the difficulties that they found themselves in.

We also need to be conscious of what is happening globally, because although we should not chase the rest of the world if it has a group of regulators that are being far too generous and wish to re-enact the boom-type crisis of the previous decade—I do not think that we are in that position any more; I think that the regulators of the world are all generally trying to be more cautious—we need to ensure that we do not do anything in Britain that is particularly penal. What we need in order to have a prosperous economy is banks with sufficient profit, reserves and capital to be able to finance a normal recovery. It is very unpopular in this country to speak up for banks making profits at the moment, or indeed at any time, but it is important that they generate reasonable working profits, because that is the best way to make them more solvent.

Mr David Ruffley (Bury St Edmunds) (Con): Is my right hon. Friend as unconvinced as I am by the relatively arbitrary figure of 4% being preferable to 3% for the leverage ratio? Like him, I believe that, if there is going to be any tightening on capital adequacy or leverage, it should be done when the recovery is more surely under way, and 3% is preferable to the 4% recommended by the Vickers commission and the parliamentary commission.

Mr Redwood: I think that I agree with my hon. Friend. What I am suggesting is that I would like to get closer to 4% and further away from 3% by growth, and I think that that could be inferred in Labour’s new clause, because I noticed that the hon. Member for Nottingham East (Mr Chris Leslie) wisely did not pledge himself firmly to 4%. Although he might secretly want 4%, like the rest of us he is probably wise enough to know that, although it might be nice to have 4% in due course, to lurch straight to a target that some big banks could not meet might be very damaging to the economy.

Neil Parish (Tiverton and Honiton) (Con): One of the problems at the moment, as I know from my constituency, is that some companies are still finding it difficult to get money from banks, so the higher the leverage requirement, the more the banks will say that they have to keep the capital and cannot lend it. I agree with my right hon. Friend entirely that we have to be very careful about how we move from 3% to 4%, because otherwise it is companies and growth that will suffer.

Mr Redwood: I think that we have wonderful agreement across the Chamber on this, which might hearten the Minister (Mr Greg Clark). We would be happier with 4% than with 3% in general terms, but we do not want to get there too quickly if that means a further jolt to expectations and confidence and further actions by banks to pull back loans, rather than financing the recovery that we clearly need from them.

Mr Andrew Love (Edmonton) (Lab/Co-op): One of the banking commission’s recommendations was that that should be devolved to the regulator to decide and that we should not set a target or a figure. The Government seem to be resisting that, and for the reasons that have been outlined in relation to growth and living standards. What does the right hon. Gentleman think about the proposal to give that to the regulator earlier than the Government suggest?

Mr Redwood: I think that a Government have to take responsibility for the big calls on economic policy. They can take very good advice from independent regulators and the Bank of England, and sensible Chancellors take good advice, but ultimately it is the Chancellor of the Exchequer and the Prime Minister of the day who have their names on all that, and the electorate will expect them to be responsible. I think that people believe in independent central banks and independent regulators up to the point where they get it wrong, and then they look to politicians to take the blame. We have just been through a period when the banking regulator, by its own admission, got it very visibly wrong.

Mr Love: The Government are suggesting that the regulators will get it wrong in 2018, and the commissions say that they will get it wrong a little sooner. Is this not an argument about timing and when the economy will be out of its current difficulties?

Mr Redwood: It is important that we should have proper discussion and informed debate, taking the best advice, so that we can try to get things right for a change. We owe it to all our electors and the economy generally to try to get the matter right.

Time is not generous, so I will be brief. My worry is that, under the previous Labour Government and in the early days of the coalition, we were running a strange policy in which, on the one hand, the Bank of England was trying to depress the vehicle’s accelerator by creating a lot of extra money and saying, “We really need to get some of this money out there to do some good in the economy.” On the other hand, the banking regulator was depressing the vehicle’s brake, saying, “No, you can’t possibly spend that money to create more credit and do more things. The priority is for the banks to sit on the money to have better cash and capital ratios. They probably need to wind down their loan books, which we think are too big.” My observation is that if we try to drive a vehicle with one foot on the accelerator and one on the brake, the brake normally wins.

Mr Ruffley: As has been mentioned already, some in the Bank, including Sir Mervyn King, argued that insufficient lending is a consequence of insufficient capital. I put that to Mr Bailey a few days ago in the Treasury Committee. I asked him about the net new lending level now compared with when funding for lending began last August, and he said that it was flat. Is that not evidence for his proposition that we cannot have tighter adequacy requirements on capital and lots more new lending? The figures show that lending is flat.

Mr Redwood: Indeed. That point also shows that we need banks to be profitable—particularly RBS, which is still largely state owned. Until the bank is making profits, its capital ratios will not improve quickly enough and it will then not be in a position to lend the money that the Government would like it to. The taxpayer would be grateful if it could be more profitable, because our shares would be worth more, which would be in the general interest.

I conclude by making the same point to the Minister. Yes, I want us to get to stronger banks with tighter ratios, but I want us to get there through growth and growth in bank profits—particularly for HBOS and RBS, in which we have a large state stake and whose results have been disappointing for a number of years. If we can get to that happy position, we can have a bit of growth and some more profitability and then the regulator will have to have a sensible conversation with the banks; it will say that some of the money has to be put into cash and capital so that they are stronger. We will be the better for that.

How should the public sector present its case for money

 

            Uk politics is dominated by the debate about how much money each public service needs and deserves.  Labour specialise in defending each and every public service, regarding any attempt to do more for less or to reduce certain types of public service as damaging and against the public interest. The public sector itself spends a lot of time and some of the taxpayers money on presenting its case for more cash.

           Of course those managing public services should be expected  to stand up for their own service. They need to tell the politicians making the financial decisions what the consequences are likely to be for any given level of financial support. The issues arise as to how much they should spend on promoting their views on financial resources, whether they should do all this in public as well as in private, and how can those making financial judgements be sure they are getting a fair and balanced understanding of what the money will buy?

         In recent years some public sector managers and public sector suppliers have worked with lobbyists, PR and advertising people to get across their need for cash. They often hire a dining room in the Commons to present their general case to groups of MPs over meals or at receptions. Various interests provide financial support and other back up to All party Parliamentary groups. In the health field most different types of illness have groups and campaigns to explain the importance of their treatment group, the need to use certain drugs and protocols and the like. How much of this is sensible? Should there be any limits on what the public sector pays to lobby the public sector? Is it better if the lobbying is done by a private sector supplier who hopes to get the contract or the extra business  if the case is accepted? 

           Should some or all of this argument be made in private to Ministers responsible and to MPs taking an interest, or should it be part of a public campaign? If it is public, does it make the relationship between public officials responsible for proposing budgets, and politicians having to settle the budgets, more difficult?

           The politicians have to be the taxpayers’ representatives as well as the service providers’ leader. They are the substitute for the many choices of individuals in the market weighing price, value, need  and performance. They require good impartial information from their managers about the options for service delivery. They need to find a way of driving quality improvement and cost reduction. They need to choose between the nice to have and the essential to buy, to end up with a balanced and affordable package for taxpayers and service users.

Mr Redwood’s intervention during the debate on the European Union (Referendum) Bill, 5 July

Mr Redwood (Wokingham) (Con): I am grateful to the hon. Lady, who has great credentials. Does she agree that any future Government will have to negotiate a new relationship because of the power of the euro and its impulsion towards federalism?

Ms Gisela Stuart (Birmingham, Edgbaston) (Lab): Yes, they will.

That takes me on to the one thought that I want people to take away with them, which seems to have been forgotten. We have slipped into basing this on whether we are going to vote for or against, but we will have plenty of time to make our decision on that. In debating the arguments for and against a referendum, what if we were to substitute the words “general election”? Who in this place would stand here and say, “We can’t possibly have a general election—it would be really bad for the economy, it would be really costly, it would affect business.” Every so often in the democratic process we have general elections, and we must apply the same principle to something as significant as this. We have reached the point when people will have to be asked, and we cannot duck it.

Change in the public sector

 

 When Tony Blair allowed Gordon Brown to step up the rate of increase in public spending after 2001, he did have a mantra which said extra money had to go hand in hand with reform. He attempted to introduce more types of school, developing the Academy model. He came to the conclusion that he had been wrong in his first period in office to remove the outgoing Conservative government’s reforms in the NHS to try to give patients more choice and more control over how the money is spent. All this proved very contentious with his own side, and especially with the public sector trade unions.

          One of the main problems with monopoly public services is there is no way of ensuring change, innovation and progress. Whenever the service disappoints or lets people down, the cry goes up from the providers that more money is the only thing that is required to put it right.  There is no easy way of closing down, replacing  or stopping a public service which is no longer needed, or which is failing.

           The customers of public service, the taxpayers, have little choice or authority over the providers in most cases. I do not get to use many public services. I do have to use the Council rubbish collection service, and pay for it through my Council Tax.  If it were a bad service, I would have to try to complain  through a Councillor. I cannot simply switch to a cheaper or better supplier. There is no competitive edge in the service market, and the end user is not necessarily   the customer. The customer of the refuse service is in many areas in effect  the Council not the homeowners. This means the service provider is more interested in wooing the Council officials than the users, unless the Council is well run and focused on end customer satisfaction.

           Various reformers have sought to find ways to strengthen the customer voice, to empower the end users who pay through their taxes. With the current monopoly model for most services there are rows over rationing -some  users cannot get the school place they want for their child, or cannot get the treatment they need when they need it from their local hospital. There is also a reluctance to close down failing services, as any closure always produces a small group campaigning to keep the service open, or petitions and protests from the providers.

            There is also a heavy reliance in public service on enforcement and penalties for improper use of services as defined by the public provider, and practically no reliance on incentives or rewards. My local refuse service limits people to a certain number of refuse sacks a year to limit the cost of landfill disposal for the Council. If you need to dump more you have pay extra. I am happy with that idea. I would also like an incentive proposal. As I do not use all the sacks they supply me with, why do I not get a rebate on my refuse charge? One of the ways to test out how popular some suitable free public services really are might be to allow incentive payments for non use, as with my refuse sack idea.

Who should pay for political parties?

 

I do not agree with the idea that taxpayers should finance political parties. It is healthier if parties have to raise money from their members for their political purposes. There has been some movement towards more taxpayer funding of parties in the UK, but they still need money from voluntary donation to survive and prosper.

The rule behind voluntary subscription is simple. Any UK elector, individual, company or union can give money to a political party which they agree with and wish to support. What they should not do is to give money to a political party with conditions attached. It is against the rules to give money to buy a change of policy or to purchase a particular candidate at a selection.

So if an individual wants a referendum in the next Parliament on the EU it is fine for them to give money to the Conservative party who wish to hold one. It would not be fine for that individual to go to one of the other parties not offering a referendum and say they will give them the money if they change their policy and offer one.

Issues over candidate selection depend on the rules of the individual parties and constituency associations. It is not against the rules to enrol more people into an association prior to a new candidate selection, though parties usually have some requirement for people to be members for a specified time period before the selection to qualify to vote in it. Selection competitions have rules over how candidates can approach members to seek their  votes. In order to prove malpractice in any given selection procedure those making the allegations would have to prove that people were enrolled without their knowledge or consent, or their votes were manipulated or given without their own control over how they were cast.

Parties normally  wish to ensure that there is  no concerted attempt by an outside group or external institution to control or influence the type of candidates  selected or the views of the candidates selected.

Next week I want to look at the issue of how the public sector lobbies, and the extent to which public money is used to try to persuade decision takers in the public sector to spend more public sector cash.

A first step towards a referendum on the EU

 

Yesterday in Parliament we voted for a referendum on the EU before 2017. No Labour of Lib Dem MPs opposed it, though their parties told them not to vote for it.

During the debate the critics of a referendum trotted out the usual lies and false threats. They implied that the rest of the EU would refuse to trade with us if we left or if we insist on a new relationship. These MPs declined to understand that we buy more from them than we sell to them, that the Germans have said they will want to carry on trading with us, and no-one serious in the UK is suggesting disrupting our trade. Our trade is anyway governed by international rules today, so the EU will need to abide by them come what may.

They also argued that a referendum would create uncertainty for business. A good answer was that on such an argument we should not hold General Elections either, as they create uncertainties for business. Democracy is vital, and every MP should be upholding it. As so many Labour and Liberal MPs voted for Nice, Amsterdam and Lisbon, the very least they could do is let the UK voters decide whether they wish to stay in this undemocratic arrangement or not.

What came across yesterday was the tiredness and the feebleness of the pro EU arguments. There was a stubborn unwillingness to grasp the essential truth that as the Uk does not intend to join the Euro we need a new relationship with the EU which is fast becoming a federal state designed to stand behind the Euro. It was also bizarre that they spoke against a referendum yet refused to vote against one!

It was a good first day for the Bill. The Commons expressed a strong wish to see this Bill to the Statute book. The Lords would be well advised to understand the strength of feeling in the Commons that the UK voters need a say on this vital issue. They would also be wise to grasp that Labour is not happy with its policy of indecision. If Labour is serious about wanting to win in 2015 they will need to rethink their policy and welcome the idea of renegotiation and a referendum.

To the lonely Lib Dem MP who told us the electors are more concerned about jobs and prosperity than the EU, I say he should realise that most people in the UK now understand that one of the great impediments to more jobs and prosperity is the EU itself, with all its extra costs, taxes, rules and its deeply damaging Euro. The recession in Euroland is holding back the UK. We need to fix the EU relationship I n order to generate more jobs – how else, for example, do we get the cheap energy our business and consumers need?

A message from America

 

On Wednesday night I heard a lecture by Grover Norquist, the Head of the Americans for Tax Reform, who is in London.

I used to talk to Grover when he was working for Speaker Gingrich on visits to Washington. He has been the leading light behind the campaigns for lower taxes and smaller government in the USA.

He told us that the 25 Republican states are cutting public spending at the state level in the USA, and setting lower state taxes. As a result there is migration from some of the 12 Democrat states like California into the lower tax Republican areas, as the enterprising and successful seek more favourable tax terms for their businesses and savings. I have remarked before on how the US deficit has fallen further than the UK’s thanks to states level spending reductions, now allied to Federal level cuts as well. Apparently the lower taxes that some Republican states have introduced are also acting as a good stimulus to growth and greater prosperity.

He also told us of the success of schemes to offer parents proper school choice by empowering them to spend the money for their child’s education themselves, allowing parents from low income backgrounds to have the kind of power and choice only enjoyed by the richest in the UK when they opt out of the state system.

Grover calls his coalition the “Leave us alone coalition”. He works with all sorts of groups who want the government to do less in their areas, or who seek greater freedom. He calls the Democrat coalition the “Taking Coalition”, groups of people who seek money from the state or especially those who earn a good living out of distributing or spending state money. His language would be thought a bit sharp this side of the Atlantic, but his passion for lower taxes and his ability to demonstrate their benign effects on all went down well with his large audience in Church House.

Armies, democracy and power

 

           Western admirers of democracy are having difficulty deciding whether to condemn Egypt for an army coup against an elected President, or praise the people power which triggered a change of regime and the promise of new elections after alleged anti democratic decisions by the outgoing President. 

          It is all too easy for us in the west to feel morally superior, knowing that in the UK and the US the army does not intervene in politics, and that regime change occurs if people want it at General elections. In practice power in western democracies is more nuanced than the theoretical models suggest. It is all more complex than the slogans and soundbites we learn in our youth.

             It is true that in the UK the army has not visibly and directly intervened in politics in an unconstitutional way  since the English civil war. Even then, the army was a major force in politics largely because it was led by MPs who used the army as an adjunct to their Commons strength. In past centuries the UK has prided itself on having only a small army in peacetime, and making it clear the army leadership should only undertake tasks that the elected government proposes to them.

          However, US democracy was partly created by the field army the rebel colonists used against the British forces and the loyal settlers. Winning the war of independence led to the rest. In Great Britain the use of the army against the King in the 1640s assisted Parliament’s assertion of rights to influence and shape government.

          There has been plenty of exchange and mutual influence between the army and politics in both the US and the UK since those founding battles. Top Generals like Washington and Wellington became President or Prime Minister. Modern US Generals are potential recruits for the roles of Secreatry of State or Secretary for defence. UK Generals can end up as legislators in the Lords, and an Admiral became a Minister in the last UK government. The UK Defence chiefs join War Cabinets in the event of conflict, and have influence at all times over senior members of the government.

          The Egyptian issue raises another fundamental question – can the establishment in a country curb or even change an elected government which goes beyond the establlishment’s view of what is reasonable or permissibile conduct? In the UK a Minister is regularly advised of the legal restraints on his or her actions and is rightly expected to obey the law. The Minister’s privilege is he can change any law he does not like if he has  the agreement of his colleagues, but only for the future.

          Mr Blunkett experienced the unwillingness of his officials to implement an instruction he made concerning a prison riot. Mr Blunkett changed his mind the next morning and de facto accepted the advice he had expressly overruled before. It was an extreme and public example of a continuous process of debate between Ministers and officials. Ministers may decide (within the law) but officials may choose the timing and method of implementation unless the Minister has been very precise and foreceful in following up. A Minister may think he has decided, but officials may regard the decision as provisional or something they intend to return to later.

            More fundamental to limiting the power of the elected official is the ever looming presence of EU government in the UK. Just as the army in Egypt sought to limit or direct decisions by the elected President, so in the UK the unseen hands of the EU are constantly shaping and reshaping Uk policy on a myriad of items. Modern UK Ministers have very limtied powers of decison and discretion thanks the huge powers transferred in recent years to the EU, and thanks to the massive build up of EU law. Ministers in Euro area economies have even less power, with new governments forced to continue with the otugoing government’s economic policies however unpopular they may be.

            So before we feel too superior about the maturity of our democracy and too dismissive of those in Egypt arguing over how to find a democratic model athat works for them, we should remember two things. The army has at times played an important role in UK and US politics. Our own UK democracy is facing a crisis of authority and accountability thanks to the many decisions that now cannot be made  by any elected official, whatever the wishes of the UK people.

MPs’ pay

Parliament voted some time ago to set up an independent body called IPSA. This authority was charged with the task of setting and administering MPs pay and expenses, free of interference from MPs and without further Parliamentary votes. There was a  mood in the media that independent people should take evidence, listen to the public view, and conclude on pay and expenses.

The establishment of IPSA followed several previous attempts to have some external setting of MPs pay within the context that MPs still had to vote it through once the outside body or indexing system came up with its proposal. MPs were variously linked to a certain grade of civil servant, Headteachers, senior officers in local government and the like. Each time there was a link the comparator pay went up and MPs voted to detach themselves from it as the pay rise was thought to be too generous.

Now we learn that IPSA may propose a pay rise for MPs at the beginning of the next Parliament. Suddenly some want MPs to comment on this, or to find a way to overrule the independent body to prevent the pay rise. Many MPs are reluctant to comment, having voted for  the view that the pay has to be set independently. MPs have rightly  not been appearing on the media to complain of the pay freeze and higher pension contributions imposed this Parliament by IPSA, accepting the discipline at a time of general pay restraint and public sector pension reform.

I am not planning to expressing a view on the leaks of IPSA’s intentions. Now we have an independent system IPSA should propose and IPSA should defend  its proposals,  explaining them to the public. I am quite happy, however, to let you have your say about the leaked reports on IPSA’s plans.