Why banks don't lend to businesses

Amongst all the smoke about the current budget, the problem of bank lending to small and medium sized businesses does not get much detailed debate. The trenches between the government and the Labour opposition are drawn roughly along the lines of trying to incentivise the banks to lend, or order the state owned banks to lend. The latter position is taken of course by many Labour politicians and union leaders who like to bash bankers for the damage done to the economy during the balance sheet crisis of 2008/9.

The Business Secretary Vince Cable has stubbornly tried to get away from these caricatures of the problem and recently outlined once again why banks are not lending. Apart from the de-leveraging that banks are currently doing to prevent any future bailout (and are required by European and British law), the main reason for their failure to lend is actually their weak presence in the local economy. British banks may have become major global players and draw much of the profits from foreign investments, but, despite their protestations and adverts to the contrary they have failed to foster strong community relationships with small and medium sized businesses in the local economy. It is here that local knowledge is generated which would allow banks to accurately assess risks of investments, and make informed choices about the financial support they grant to local businesses.

Not quite so local

This lack of local knowledge is not something that happened over night. In fact, Britain has long cultivated a different banking culture to that of Germany where banks are highly diversified and engaged in the local economy through investments. British banks have mainly drawn their income from investments in the commodity and financial markets whereas the investment functions often fell to entrepreneurial and venture capital. To turn this around and to create a more diversified banking sector is a major undertaking, and it would start with promoting more competition in the banking sector in Britain.

Universal benefits to go?

Britain has a long tradition of universal benefits. Whilst some of those are rightly celebrated as a means to lift some people out of poverty and provide a unifying thread across all sections of society, some of them have become a serious challenge to the public purse.

Politicians who question the usefulness or wisdom of universal benefits, such as free bus passes for all pensioners, run into two problems. First, they sound as if they grudge some of the poorest in society the most minimal types of support. And, second, they need to explain how universal benefits can be re-designed in such a way that they are targeted at the most in need. Means testing, the conventional form of targeting benefits to particular social groups, is an expensive bureaucratic exercise whose cost often exceeds the potential savings.

Whilst universal benefits are only minor expenditure items in large budgets (such as that of Central government or England's), for the devolved administrations in Cardiff, Edinburgh and Belfast some universal benefits constitute a major item of expenditure simply because their devolved budgets are smaller and predominantly in those areas that 'host' universal benefits such as bus passes or prescription charges.

The former Scottish Auditor General has now raised some serious concerns about the culture of 'freebies' from devolved governments. In a BBC interview he argues that the demographic changes over the last 2 decades makes a strong case for reviewing some universal benefits. future projections of the costs of universal benefits support his argument. In the long term, some of the universal benefits are simply unsustainable and it appear also morally questionable why millionaires in Wales or Scotland should receive free prescriptions for medication.

The Scottish Labour leader has also floated some controversial ideas about universal benefits, the first time a Labour leader has ventured into this territory. The Welsh government under Carwin Jones has strongly rejected her argument and insists that universal benefits are here (in Wales) to stay. Yet, the Welsh government's case is even weaker than that of the other devolved governments. With a yawning gap in the budget for the NHS (this year alone about £240 million need to be found to save NHS health boards from bankruptcy), and no new funding settlement for Wales in sight, Carwin Jones hopes for a balanced budget are fast disappearing. So far, he has managed to lay all blame on everyone else but the profligacy and mismanagement of his own government, but he wont be able to do this much longer.

Revisiting the extent and usefulness of universal benefits may just be a starting point to reduce the gap in the Welsh budget. The biggest hurdle for this however may not have anything to do with the number crunching, but with Carwin Jones' character. Looking at universal benefits takes political courage and that is not something the Welsh Labour leader is known for.

On the personalisation of politics

A few days ago, the Conservative member of parliament Nadine Dorries once again made some impolitic remarks for which she wont be loved by her own party. Dorries described the Prime Minister and the Chancellor (members of her own party) as ‘posh boys who dont know the price of milk’. What she presumably meant by that is that Cameron and Osborne are ‘out of touch’ with ordinary people in this country. This is a line that has been relentlessly pushed by the Labour leader Ed Miliband and which culminated in his prompts to the ministerial front bench to reveal whether they would benefit from the reduction of income tax to 45% which is to come into force in April 2013. 

The public demand to reveal the income and assets of politicians has become stronger over the last months and you may think that this is the way is should go. However, I think it is mistaken for two reasons. 

First, it is a deflection from the real arguments that we should have: what are the benefits to society of particular policies and which groups may be disadvantaged or may inordinately benefit from them. Knowing whether any particular politician falls into one or the other group is of little use when assessing the overall impact of a policy on society. It does however personalise the debate. This focus on alleged individual benefits can only strengthen the suspicions of the wider public that politicians are engaged in conspiracies to further their own interest. This does not exactly serve anybody, given the low esteem politicians are held in right now. 

But personalising political debates also hints at a paucity of alternative arguments and it is a sign of the floundering tactics of Ed Miliband and his team that he favours this road. The facts of the last budget were portrayed in the public debate on a curiously lop-sided fashion. The centre-piece of the budget was the raising of the income tax threshold, instantly lifting the tax burden for 23 million people in the UK and taking thousands of the poorest families out of income tax altogether, a step that should resonate with Labour and its supporters. 

Yet it is probably a sign of the frustration that the coalition government has delivered some of what speaks to the core principles of the Labour Party that the shadow front bench have been left with little else to suggest in the public debate. Their fall-back strategy is to personalise some of the more marginal aspects of the budget (Labour leader Ed Miliband made much of a tax on pasties and visited a pasty shop on the day after the budget to drive his point home). Yet all this does is to bring about an unfortunate shift from debating policies to debating personal circumstances of politicians. Miliband and his supporters should be careful what they wish for.  

Once, and this is my second point, you start suggesting that it is the personal background of politicians which guides them in making national policy, this bandwagon may not be able to stop. If you argue that personal income guides taxation policy, why not reveal whether they are straight or gay when it comes to legislation on gay marriage? Or their medical records where health policy is concerned? 

It is also a terrain Labour would not necessarily do well in, given that Harriet Harman is one of the richest aristocrats in Britain and almost the entire front bench of Labour in the House of Commons has been educated privately (which puts them in the top 6% of earners in this country). And why stop there? Would the religious affiliation of politicians matter if they come to legislate on the reform of the House of Lords and whether or not the Bishops of the Church of England should retain their seats? Miliband is Jewish and I am sure he would agree that, say, discussing the religious affiliation of parliamentarians when legislating on the dis-establishment of the Church of England provides little to the public debate? 

So it seems the personalisation of politics is a dangerous path and does a monumental disservice to the conduct of political dispute in this country. Questioning the motives of politicians in making policy appears to run counter to the principles of mutual respect and rational argument. Let us hope that Labour turns its backs on this risky strategy. If they don’t, we all can only lose in the process. 

How much do we need to know about our politicians?

The London Mayoral contest has brought us some novelties in the way candidates present themselves. The most significant change is probably the disclosure of the candidates' income  statements. Although the Labour candidate Ken Livingstone has been less than forthcoming about his income, the leader of the Labour Party Ed Miliband has argued that income tax submissions should be made public by all prospective candidates in UK elections. Miliband's intervention in the Mayoral election has form. It was the Labour leader who started this wave of revelations by asking the frontbench of the coalition government in his response to the budget whether they would personally benefit from the reduction in income tax. 

If all candidates for public office are in future required to reveal their income and the tax they pay, the UK would only follow in the footsteps of the US where income tax disclosure is common practice in elections. 

However, the argument put forward so far to support income tax disclosure strikes me as odd. Ed Miliband once again articulated the rationale behind this on the Andrew Marr Show last Sunday. Voters, he said, should know if legislators would benefit from the laws they vote on. Asked by Marr whether this should include their medical history, Miliband tried to backpaddle, suggesting that medical history was an entirely different matter. 

But it seems to me that this position lacks coherence as well as plausibility. Such a policy can only be coherent if all aspects of the personal lives of legislators are revealed so that voters can see whether or not they benefit from legal changes they enact. Hence Miliband would be wrong to arbitrarily limiting disclosure to income and taxation. Clearly the rule of transparency would apply to all aspects of legislators' lives. 

Yet, the proposal also lacks plausibility in the first place. Legislators are human beings, living in the society on which they impose legal rules as part of their daily routine. The disclosure of whether or not a parliamentarian could potentially benefit from legislation applies to all domains of her or his personal life, and, according to Miliband, complete transparency is taken to be critical for public debate of proposed legislation. 


But why should that be the case? What does it add to our understanding of the proposals for, say gay marriage, whether or not a particular legislator is straight, married, single, gay, or divorced? Legislation is enacted on the merits of laws for the whole of society, not whether or not a specific individual benefits from it. 

The point becomes clear when we examine more closely how we discuss legislation in public debate. A particular focus of deliberating on the merits of proposed legislation is whether or not particular groups of people are being disadvantaged or disproportionately advantaged. But we do not inquire whether any specific individual is set to gain from it. The latter would be a clear indication that we believe the legislative process is corrupted, say by passing laws that only benefit one individual rather than society. Clearly Miliband does not want to suggest that legislators on the government benches are corrupt? 

So, focussing on personal gain or loss is  either indicative of a notion of a corrupted legislative process or it is simply a fishing exercise for party political gain. As the latter, it lacks plausibility. Needless to say, it may deter people from entering politics and shift the focus from assessing the effect of legislation for the whole of society to individuals. 


Watching Miliband's budget response, the main intention of this move becomes clearer. It is a piece of political theatre which remains one of the few avenues open to him as he is struggling to win arguments. Personalising politics is always a poor choice for any politician but with a leader who regularly fails to put in convincing performances, the Labour Party may have few other options than muck-racking. 

Polly Toynbee in overdrive

Polly Toynbee is back! Presumably she just couldn't bear the bad news arriving at her posh Italian villa from the shores of these green islands and so she had to cut her holiday short to write a piece that is riddled with class war terminology.

(You can read it HERE: http://www.guardian.co.uk/commentisfree/2011/nov/29/osborne-class-war-autumn-statement)

While she clearly pleased many of her supporters on the Guardian website with her comments, the Labour Party will lose in the long term if it thinks this immoderate language serves it well. The reason why Labour should tread carefully is simple. Osborne's autumn statement set out a series of factors that makes it impossible to eliminate the budget deficit by the next election. Toynbee is furious that this means more pain for everyone. Yet, what she fails to mention is that the government's plans to balance the books are now almost identical to the one by Labour. In fact, borrowing will be even higher now than under the Darling Plan, given the difficult economic circumstances for the next couple of years.

In essence, Toynbee therefore already got what she wanted: higher borrowing which will be spent on infrastructure projects up and down the country. So, why does she think this is class warfare when it is exactly what she called for only weeks ago?

The conclusion can only be that as Labour's plans to revive the economy and the government's budget are getting more similar, Labour is running out of the ability to portray itself as radically different from the coalition. Hence the shrill sounds from Ed Balls and Toynbee. Toynbee thinks there is only one way to go now: further to the left. For the moment, Darling's plan is still Labour policy. We will see over the next couple of weeks if the Ed Miliband and his shadow chancellor stay in the middle of the road.