Let’s call time on libraries, the BBC and art galleries and unleash a cultural renaissance

We know that long-term economic success requires creative destruction of existing industries in order that innovation triumphs over obsolescence. We also know that the short-term pain of creative destruction is real and politically unattractive. And yet we might expect that creative destruction would be at its strongest in our, well, creative industries. But actually there is such a lot of tax-payer funded protectionism that some parts of our creative institutions are becoming obsolescent and facing a sad decline. The UK is much more at ease privatising drinking water than reforming the “High Culture” industry. But we must tackle “Creative Protectionism”, so where do we start?

Like most other Northern working class boys of my era, I grew up oblivious to High Culture. But I had the (almost corny) experience of being rescued by a passionate teacher of English Literature, who intervened when I was threatened with explusion. He wasn’t even my class teacher. But he gave up his free time to immerse me in the Literary Pantheon. The more obscure or difficult the text, the more important I knew it to be. I couldn’t get enough of it and he pushed me off to read a degree in English at Oxford, the first person from my school to go there. But I was poleaxed at the first lecture I attended when a Marxist professor argued that the whole edifice of “Great Literature” was constructed solely for the economic benefit of publishers and academics whose livelihoods depended on a continuing demand for what they in particular knew, owned and could sell. This seemed just too cynical until I attended my first tutorial. Embarking on a compulsory course in Anglo Saxon, my charming old buffer of a tutor explained that he was one of less than 50 people left in the world who could proficiently speak and write in Anglo Saxon. He had himself been taught by Tolkien. He was sweet enough to explain that until his tenured generation retired we would all have to learn this language because there was nothing else they knew or could teach. (The compulsory course died with them.) And then I met and became great friends with a truly gifted young academic and author, who rejected the almost certain chance to teach literature at Oxford or become the next Dario Fo as elitist nonsense. He chose (successfully) to write TV soap opera scripts for a living. He was clear that literary merit in something watched by millions of ordinary people was worth much more than teaching dead poets to posh kids at Oxford or being feted by a few thousand government-subsidised rich theatre-goers. These formative experiences have set my enduring principles for public policy on culture – the importance of giving everyone, irrespective of background, inspiring access to the best cultural experiences; the need to avoid funding being permanently tied-up in out-of-date priorities, defended by those whose self-interest is threatened by change; the need to create new cultural giants, not just curate the old ones; the overwhelming importance of improving the everyday cultural experience of the majority, rather than occasional events for the minority.
If these sound like good principles, how is the UK doing right now? Well, the sheer scale of cultural opportunities available is overwhelming and exploding. And it’s about more than the internet. There are now 350 UK literary festivals each year (compared to just 3 of them 30 years ago) and hundreds more music festivals. London’s top museums are world beaters (e.g. the British Museum had nearly 7m visitor last year, up 40% on a decade ago). The headline art exhibitions sell-out and attract astonishing numbers (e.g. David Hockney’s most recent, and wonderful, London show attracted nearly three-quarters of a million of people). London’s 45 theatres attracted an audience of nearly 15m last year, up by half on 30 years ago, and offering 270 new productions and filling three-quarters of the seats. The number of new books being published each year keeps rising and the sale of translated books has risen by 30% in the last decade. The art form of choice for young men is poetry – with thousands of them writing and performing rap music. And then there is the internet. 100 hours of video are uploaded onto YouTube every minute of the day and YouTube gets 1 billion views a day. A quarter of billion people are active on twitter and a billion on Facebook, wanting to be followed and sharing what they’ve read, heard or seen from all over the world. There are more than 12m active bloggers self-publishing their work. Digital technology is giving us instant access to a huge heritage stock of culture. We have 500 years of music to listen to, 100 years of cinema and 60 years of TV to watch, along with 700 years of paintings and 2000 years of literature and sculpture to admire. And then we can share what we find.

Cultural fashions come and go. In the market, this works fine when the consumer is king. Money follows preferences at, often, great speed. So today’s UK cinema audiences are just one-tenth of their peak in the late 1940s. But they have tripled from the lowest ever point in 1984 when home videos first appeared. Antique furniture is another case study. Victorian and Edwardian furniture became fashionable and valuable in the 1990s, but in the last decade the price of Victorian and Edwardian furniture has fallen by two-thirds. In fact, the price of all antique furniture has fallen by a third in that period and continues to decline. In neither case has the Government felt the need to intervene. It hasn’t kept open surplus cinemas or asked the Bank of England to buy surplus Victorian furniture to keep prices high. Furniture and cinema are two cultural markets where the government doesn’t get much involved. But there is no real rhyme or reason to taxpayer intervention in culture. So, Government spends £1 billion each year on libraries, but virtually nothing on creating new literature. Taxpayers are obliged (on pain of going to prison) to put more than £2 billion each year into TV shows which look just the same as the free-to-watch content on the commercial channels. Classical musicians who perform (often pretty average) music created hundreds of years ago are handsomely looked after by the taxpayer but experimental pop musicians who create new music receive nothing. Billions of pounds is tied-up in operating bricks-and-mortar (e.g. Victorian art galleries) whilst broadband infrastructure (giving digital access, for example, to the world’s galleries) remains poor in many areas. The richest people in the world are given generous subsidies to watch opera in London (reducing their tickets to £175), whilst lower-income families have no hope of affording the average £50 ticket for a popular West End theatre production.

But it’s not just that public spending is arbitrary. Perhaps even more important is that those spending our taxes on culture are satisfying fewer and fewer consumers. Public spending is driven by inertia, giving money to the same things year after year. And if anyone challenges that spending, they will be met by a ferocious, well organised and deafening lobby protecting the status quo. This is usually enough to deter most politicians from asking too many questions. I am yet to meet the politician who doesn’t fear the roar of the librarian, the armchair grumbling of the Radio 4 listener or the eyebrow arching of the ballet-loving plutocrat. But in the last year only 20% of people went to an art gallery or exhibition, just 20% saw a play in a theatre, only 4% went to an opera or a dance event. More striking is how few people were publicly creative themselves- only about 1 in 50 sang, played an instrument, published their writing or took part in a play. If so few people consume or create “The Arts”, why is the political lobby for them so strong? Clearly, they trade heavily on the lazy assumption that “The Arts” are morally and spiritually good for people and that without them civilised values would quickly fall apart. But they also have a brilliant self-serving defence mechanism – the less that anyone wants the particular cultural service, the stronger the moral argument to protect it from the market and the greater the need for public subsidy. Libraries are a good example of this. 74% of people believe libraries are important for the wider community but only 47% believe they are important for themselves; only 36% of adults actually visit a library and only 17% of people borrow books. Indeed, adult lending (of both books and audio-visual) has halved since 2000, with book borrowing now largely focused on children and prolific adult readers. Each time a book is borrowed from a public library it costs the taxpayer about £4. That’s about the wholesale price of a new book. So it would, of course, be as cheap to give everyone a new book to keep as it is to lend them an old one and ask for it back! People read more than ever; they just don’t care for or need libraries. It is not just libraries which are in decline. There have been sharp downturns in visitor numbers at traditional art galleries outside London. This is in spite of the national decision to abolish entrance charges. The fall in numbers in 2013, in just one year, was striking even at some of our finest galleries – e.g. the Ashmolean in Oxford down 12%, the Birmingham Museum & Art Gallery down 13%, the Scottish Portrait Gallery down 20% and the Walker Art Gallery in Liverpool down 30%. This has been a clear trend over the last 10 years – whether it’s the new blockbusters like the Royal Armouries in Leeds only getting two-thirds of the visitors it had 10 years ago or the traditional civic museums like the Shipley Gallery in Gateshead where numbers have halved. These trends can be seen in modern media too. Let’s look at TV, which is something that young people have stopped doing. Those aged 16-24 watch less than half as many hours of TV as those aged 55-64, whilst pensioners watch TV for nearly 40% of the time that they are awake. The median age of a BBC1 viewer is 59 (compared to 40 for the population as a whole). But it’s not just that people watch less TV. It’s that they watch much less of what’s been funded by their taxes. Whereas 30 years ago, BBC1 and BBC2 had just over half of the total TV audience, today they have little more than a quarter. But every household is obliged to pay £80 a year just for these 2 channels, whether they want them or not. Meanwhile, BBC TV struggles to look different to its main rivals, comes second in many categories it used to dominate (eg news, sport, music). It’s as similar picture on radio, if you excuse the pun. The majority of listeners under 45 years of age listen to commercial channels and 85% of people never listen to BBC local radio, a service almost exclusively made for pensioners.
The budgets for all these subsidised services (be they libraries, galleries or public service TV) are clearly under pressure, but they are not being fundamentally challenged. When under pressure, these subsidy-junkies quickly ditch their public service mission and play politics. So in spite of its failure to attract young audiences, the BBC is scrapping BBC3, its one TV channel for young people, in order to protect budgets for its oldest audiences. Guess which audience is twice as likely to vote or pressurise politicians? Given that public funding is limited and that out-of-date providers hog our cultural assets, if we’re going to break the current inertia we will need some big, simple bold proposals. Here are 4 from me to stimulate the debate:

(1) Give the 10 million poorest people a Culture Card worth £150 per year and let them make their own choices on what culture they want to access

This is my “prevenge” against the argument that taxpayer-funded universal services are the only want to protect the poorest in society. Given that we can save some £1.5 billion per year from my options below, we can afford to put £150 into the hands of each of the 10m poorest people in society. Lacking the paternalistic gene, I would rather let people spend this as they wish. But I accept that any progress in this area will require a modernised paternalism rather than its abolition. If the £150 is credited to a Culture Card (or account) people can spend this on approved items. There can be lots of debate about what gets approved. But £150 is a meaningful amount of money. It is more than enough for example to buy both a Kindle and a year’s subscription to Kindle Unlimited giving access to 600,000 books. It’s enough to buy 3 theatre tickets. It’s enough to visit a full price art gallery exhibition every month. If allowed, it’s enough to buy a subscription to both Spotify and Netflix.

(2) End public funding for libraries and let people find new solutions

If we just said that by 2016 public funding for libraries was ending, new solutions would emerge. £1 billion would be saved. If not recycled into my Culture Card, this could alternatively provide a 5% cut in council tax or a trebling of the Arts Council budget, depending on your preferences. Only about 10% of library spend goes on books and materials. The biggest cost is staffing. So the first option is for volunteers to step forward. Indeed they have been doing just this since austerity started in 2010 – the number of volunteers has doubled and 1 in 6 libraries are now entirely run by volunteers. The world is full of local volunteers, e.g. the 200,000 volunteers in charity shops. The second biggest cost is the buildings. Very rarely is there a reason anymore to have a dedicated library building. The world is full of under-used buildings – shops, community centres, public sector offices, etc. Given that library catalogues are available online and content is going digital, the opportunity for libraries to co-locate are legion. In this new world, libraries would be free to charge for books and seek philanthropic sponsorship. People might be encouraged to donate their previously read books, recirculating books in the same way that charity shops do right now. With a billion pounds a year of annual savings and lots of capital receipts from buildings, Government could endow a national foundation with the funds to create a national infrastructure to support local libraries – it could hold one big collection (rather than the 200 we have now); it could use Amazon or others to manage storage and distribution; it could digitise books and give access to home downloading; it could create one big website, linked to all the local library charities, or maybe it could just add an item to Amazon’s market place. Or maybe this is all just a new version of an out-of-date service. Do we actually need to bother with physical books at all? It looks as though the market is about to explode with Spotify-for-books solutions (Oyster, Kindle Unlimited, etc) where for a pound or two a week readers will have unlimited access to e-books. Maybe we should just close libraries and rely on the Culture Card and the online book services? /p>

(3) End the BBC Licence Fee, sell-off the BBC and let it thrive

Ending the BBC’s licence fee is (and is intended to be) an act of kindness, not cruelty. I think it will thrive and grown in a market where it has to earn its revenue from the free-choice of consumers. Conversely, I think it will die a long and horrible death if it stays licence funded, where under pressure from a declining revenue it retreats to a more and more conservative offer to its core, older audience to muster their political support. In its propaganda for keeping the licence fee, the BBC routinely cites market research showing that the public is willing to pay more than the £145 for its services. In which case, why compel them (under threat of criminal conviction and time in prison) to pay for it? Let’s assume that the BBC stayed advert-free and look at some examples. It’s hard to imagine BBC Radio 5’s 7m listeners would be unwilling to pay £11 per year to cover its existing costs. I, and most listeners, would certainly be willing to pay several times more. I would be pleased to save the £10 per year needed for Radio 4 (which I am coming to loathe) but I’m sure most of the 11m listeners would be willing to pay several times more than £10. I’d probably subscribe to the £100 per year needed for BBC TV, but if a lot opted out I look forward to being heavily wooed with new exciting content to go as far as £200 per year. But then many parents with young children would probably pay that just for CBBC and CBeebies. These few examples preview a new world if which both popular and niche services thrive and expand in response to customer demand. In terms of practicalities, payment for digital TV and online content are already well established. The BBC would need to find a way to paywall radio, but I am sure that’s not beyond them. As a country we could sell-off the BBC, perhaps as a number of different companies to encourage diversity and competition. Let’s assume that generated a£10 billion receipt. This could fund a new “British Production Trust”, which like the Wellcome Trust for science invests its endowment in the capital markets to generate an annual income to pay for good works. The “BPT” would finance (and co-finance) high quality, innovative or niche content to fill gaps in the commercial market. With a £10 billion endowment and assuming a commercial return on a third of its projects, it could probably afford £500m each year – equal to the current budget for BBC2 or the national BBC radio channels.

(4) Empty our art galleries of their collections, fill them with working artists and get the old artworks into new everyday settings

There are 210,000 oil paintings in public collections in the UK. Visiting them all would require you to get around 3,200 different collections. Most people just visit their local collections. But once they’ve been once or twice they’ve seen them and the incentive to return is limited. But even if you managed to visit all 3,200 collections (a feat which assuming one visit per week would take 60 years of dedication) you would only see one-fifth of the 210,000 paintings. Only 20% of the paintings are on display to the public. The other 170,000 paintings are in storage. My proposal is that all 210,000 paintings should be available on request for public display in the everyday places where the public goes about its normal business. They could be lent out to any one with a public or semi-public space – in offices and workplaces, in supermarkets, in schools, in airports, in churches, in restaurants, in colleges, in shopping malls, in leisure centres, etc. Most of these buildings have just as much as security and climate control as galleries and archives. One way or another public funding has bought or maintained these collections, so the public should get to look at them, in the places they visit. It would be great to think of Tesco curating inspired exhibitions or a primary school using a term with 3 Pre-Raphaelite paintings as the basis of a history project on life before Raphael, in his time and during the revival of the style which predated him. The marvellous Public Catalogue Foundation has digitally catalogued all 210,000 of these paintings, so the lending can begin. Emptied of their collections, our galleries could be filled with the studios and exhibitions of working artists. There could be high profile competitions to win a year’s placement in the gallery, letting the public see artists at work and giving them the chance to buy the art produced. Rather than paying a bored security guard in a gallery to watch almost nobody visit some dull Victorian paintings, why not use those salaries to create a bursaries for each artist during their stay in the gallery? Imagine school visits to these working artists inspiring a next generation of youngsters to want to produce their own work, rather than boring the pants off them touring the hallowed galleries of yesterday’s fashions. Clearly there are a few national galleries in London where the sheer numbers of tourists mean that the same old collection is constantly fresh to large numbers of visitors. They might stick with the old model, but introduce entrance charges instead of taxpayer-funded free entrance. Most visitors expect charges, which they pay in other capital cities.

These are just 4 ideas we could unleash if we’re brave enough to break the inertia in our publicly funded arts and move on. There are lots more. For example, as cinemas move from celluloid to digital in the next few years, imagine if they could be convinced (or received a little public funding) to give open access to half their screens on the quiet nights (Monday to Thursday) allowing young kids to put on cinema showing of homemade movies for their social networks? The extra sales of popcorn alone would probably pay for any costs. But before the new comes the end of the old and to inspire the public we must be bold.

A simple idea to end poverty for millions of households overnight – at no cost

I have a simple proposal which could end poverty overnight for millions of British people. It doesn’t cost a penny – quite the opposite. It would save the government billions of pounds every year. It would make the UK a much fairer society. So, what’s the catch? Well, this ingenious way of making the UK a fairer place may itself be considered just too unfair by the wider majority of people. The only barrier to my proposal is the potential resentment of the majority to a minority (i.e. the poor) getting something special. To be politically feasible it would need a Grand Alliance of right-wingers and the left-wingers to overcome the centrist moderates. I’m not saying that centrists are against ending poverty. Usually they are reasonably supportive – so long as it doesn’t require too much effort or imagination. But they don’t like only the poor getting something for nothing – especially if it’s a really big something. And in my proposal the poor would certainly get a pretty big something.

Before I set out my proposal, let’s look at the potential for a Grand Alliance of right-wingers and left-wingers. When it comes to policy ideas to address poverty, what is each group currently looking for? The right-wingers want three things: to make big cuts in welfare spending;to find an iconic neo-Thatcherite policy which has a chance of turning the poor into conservatives; to reverse the sharp decline in the proportion of people who own their own home. The left-wingers want three very different things: to protect the poor from austerity; to help working people on low wages with the cost of living; to find a new way to redistribute wealth without frightening away middle class voters by putting up taxes or increasing welfare spend. Luckily, my proposal ticks all six of these boxes!

So what is this proposal? It is to transfer ownership of the 4.1 million social homes in England (one-fifth of the total homes in the country) to the tenants who live in them. (If the other UK countries did this too, more than 5m social homes would be given away across the UK). This is not Right to Buy. The tenants would get the houses without paying a penny for them. On average these homes are worth about £120,000 (ranging from £80,000 in the North to £150,000 in the South East and up to £250,000 in London). The 4m English tenants would get control of £500 billion of public assets and they would no longer have to pay the £20 billion per year of current rent. The average rent is £85 per week (ranging from £60 in the North to £100 in London). As £12 billion (two-thirds) of this rent is paid by the Government through Housing Benefit, the Government would be £12 billion per year better-off if it no longer had rents to support. This all works because the average £120,000 social home only has £18,000 of outstanding debt, leaving equity of over £100,000 for someone to enjoy. And in this proposal, it is the tenant who gets to enjoy it. But who would pay-off the £18,000 of debt for each house, equal to £75 billion across the 4m homes?. My proposal deals with this. When the homes are transferred to the tenant, the Government would retain a 20% charge (a lien) on the property which it recoups when the tenant finally sells the home. This is enough (at £24,000) to pay-off the current debt and the interest payments which would otherwise accrue between now and the sale of the home. The Government would immediately sell-off these charges (or liens), raising £100 billion in cash. With this it would pay-off the current debts. Many of these 20% stakes in the former social homes could be sold to retail investors, giving the middle class the opportunity to invest in property for £24,000 a go. It would be a low risk investment (as it would be the first charge on the property so the value of the investment is protected so long as the home doesn’t fall below 20% of its current value; in all likelihood house prices will rise, even if only modestly, increasing the value of the 20% stake). In future, those in severe housing need would have to exclusively find homes in the private market with Housing Benefit helping with their rents, as it does with millions of poor private sector tenants today. To recap, the tenants would immediately own 80% of the property. And there would be no rent to pay. Now, let’s look at the 4m tenants who would benefit (or the 5m if the rest of the UK copied this approach).

One-third are pensioners, one-third are in work and one-third are out-of-work. My proposal would mean that more than 1.25m pensioners became home-owners. They might decide to sell the home and take the average £100,000 of wealth and move to a smaller property or to join their family. They would have wealth which could be inherited by their family. This matters, as one of the key drivers of inter-generational poverty is the lack of assets and wealth to transfer to children and grandchildren. Although 70% of pensioner tenants are getting their rent paid by Housing Benefit, there are 350,000 who fully pay their rent themselves and they would be £85 per week better-off. To put that in perspective, the State Pension is only £113 per week. In addition, there are a further 300,000 who only get partial Housing Benefit and therefore pay part of their rent. So that’s 650,000 pensioners who would be substantially better-off each week, as well as being part of the 1.25m new OAP home-owners with £100,000 of equity.

Now, let’s look at the third of social tenants in work – that’s 1.55m tenants. 80% of this group earn less than £25,000 per annum, i.e. they earn less than the average income. The other 20% earn above £25,000, but mostly not much more than that. Most of the tenants (three-quarters) in work pay their own rent – so 1.2m of them would, on average, be £85 per week better-off. For someone earning £18,000 per year that’s equivalent to a 30% increase in their wages. Again many of those in work who do get Housing Benefit only get part of their rent covered so a couple of hundred thousand more people in work would be tens of pounds per week better-off. And both groups in-work would have £100,000 in equity in their home, on average. One option available to them would be to use this equity to trade-up and/or relocate to another private home. They would have entered the same free world as other home-owners.

Finally, let’s look at the third of working age tenants who are not in work. This group broadly falls into two halves. The first half is the 850,000 tenants who are affected by illness or disability. This includes those who are long-term ill or disabled (700,000), temporarily ill or disabled (50,000) or carers for their own family (100,000). 90% of this group receive housing benefit. Whilst a minority of this group can and should return to work, most of the group will remain economically inactive. This proposal would mean that some 200,000 of them (i.e. those not receiving Housing Benefit at all) will no longer have to pay rent and a further group will no longer have to make partial payment. The second group are those who are able-bodied and in good health but not working. This group of 600,000 tenants, includes 450,000 who are unemployed and 150,000 who are inactive lone parents. About a third of this group pay all their own rent. When we step back and look at the 850,000 tenants who are not working but could, we can see that the big advantage of this proposal for them is that it greatly increases the incentive to work. At present (and even under Universal Credit), if an out-of-work social tenant on housing benefit takes a job then 70% of the extra income is clawed back, as the Government reduces housing benefit support. Losing housing benefit is a big disincentive to returning to work. For single people, for example, it is likely that the social rent of £85 per week is a bigger part of their welfare support than their unemployment benefit of £72. The beauty of my proposal is that there is no rent, so there is no housing benefit and therefore there is nothing to lose in returning to work. This kills dead the 70% marginal tax rate (from the Housing Benefit withdrawal taper) on those returning to work. This is also true for those already in work receiving Housing Benefit. At the moment, if they find a higher paid job or increase the number of hours they work each week, they are penalised by 70% of the increased wages being cancelled out by lost housing benefit.

Essentially this is a simple proposal – give away the homes, clear £75 billion of debt, relieve tenants of their rents and save billions per year in benefits. There are a number of big practical things to think about. Firstly, the downside for the new homeowners is that they have to pay for their own repairs and maintenance. It is worth noting that many existing owner occupiers have low incomes – for example, even in London 40% of the poorest households (the bottom quartile) are owner-occupiers. And these millions of poorer people cope with owner occupation. For the 56% of social tenants who currently pay full or partial rent, they can use the money they save on rent to fund repairs. For many of the other 44%, the responsibility to pay for repairs will incentivise them to find the money, e.g. many pensioners will get help from their families; many who are out of work will aim to earn money to fix the home they own; many may take advantage of the freedom of being the owner to take-in in a lodger to increase their income. But for those who feel unable to cope with the liabilities, we could let them decide to continue being a tenant. Secondly, there will be those who worry that the new home owners will sell the house quickly, squander the proceeds of the sale and turn-up as a homeless case a year or two later, requiring the State to find them a home and pay the rent. If people are seriously worried about this risk, we could solve it. One way to do this would be to give the new home-owners 70% of the home value when it is sold and retain the other 10% (£12,000) for 3 or 5 years. This could be called a Welfare Bond. If the former tenant requests housing help (housing benefit or social housing) within the, say, 5 year period then he or she would forfeit the £12,000. If there are no claims in the 5 year period, then the former tenant gets a cheque for £12,000. That’s a big incentive not to go onto benefit or blow the money. Thirdly, this would all require a major piece of primary legislation as it would affect not only councils but also housing associations. It would also require Government to put in place the financial machinery to allow it all to happen smoothly (e.g. pooling receipts and debts across the country and cash-flowing the changes). But these practical things are all soluble if politicians want to drive through this proposal.

So if this is all feasible, is it desirable? The biggest challenge is resentment, especially from those renting in the private sector and those on modest incomes who have paid / are paying for their own house through monthly mortgage payments. Why should those who happen to live in social homes get such generosity? There is no easy answer to this. I could just say “people sometimes get lucky” (e.g. inheritance windfalls) or “wouldn’t it be great to give these millions of people a break?”. Or I could say “if you leave them as social homes, no one will access the £100,000 of wealth in of them or save any money” or “the people in the social homes hardly ever move out, with just 5% of properties churning each year, so we may as well just give it to them”. But I suspect that not enough people share the generosity underpinning my proposal. Nor would it win-over everyone if we explained that our society would be better – 4m poor people would have meaningful wealth; we would have the highest level of home ownership in the G7; we would have greater social and residential mobility; etc. So let’s think of what’s in it for the 80% of the British public who don’t currently live in social housing. One option would be to take the £12 billion of annual savings on housing benefit (described above) and explicitly use it for something else. For example, it is enough to virtually double public spending on adult social care. Or £12 billion would be enough to abolish taxes on the middle class – e.g. £12 billion is enough to cancel inheritance tax and stamp duty on housing sales. Or if we’re still focused on poverty, £12 billion is about enough to remove everyone on the Minimum Wage from paying tax. Or it could be used to build more shared ownership homes for first time buyers, allowing some 200,000 extra homes per year to be built. This would get the building of affordable homes back to the levels of the 1950s and 1960s. After 10 years, 2m new homes would have been built. (Alternatively, for those who believe that we need traditional social housing this could be 200,000 social homes being built each year. This is enough to replace the 4m homes sold-off over a 20 year period. In fact, only 200,000 (5%) social homes currently become vacant each year. So if we did this no-one would notice that the 4m homes had been sold-off in terms of having new, and better, ones available when they are needed.)

I return to the need for a Grand Alliance of Left and Right to face down the Moderates – partly to deal with the resentment, but also because Moderates don’t like radical changes of this magnitude. I would say to both left-wingers and right-wingers, it’s not often that any politicians get the chance to do something dramatic to sort out poverty overnight, especially in a way that costs the tax-payer a lot less. Given that both Left and Right can win from this proposal, they only lose by doing nothing, leaving all that money tied-up in the 4m homes, the poor still poor and the welfare bill climbing every year. So why not do it? Unless, either of them has got a better idea?

Israel – A “Hard Shell, Soft Centre” Solution?

The other day, after some of the worst news yet from Gaza, I overheard an English woman say “Why can’t the Arabs and Jews just stop this dreadful killing and learn to live together?”. Her companion rolled her eyes, shook her head and snapped “Dream on…” The first woman gave a sheepish grimace, clearly humiliated by her apparently banal suggestion. And yet living together (fairly) happily is what 1.7m Arabs do everyday within Israel. These are the Israeli Arabs who make up a fifth of Israel’s citizens. There are nearly twice as many Arabs living in Israel now as there were in 1947 before modern Israel was established. There are more Israeli Arabs than there are Gazan Arabs. One of the most interesting, if inevitably controversial, voices to emerge from Israel in recent years is Ishmael Khaldi, who in “A Shepherd’s Journey” tells of his rise from a poor Bedouin family in Galilee to become a prominent Israeli diplomat. Like many Bedouin of his generation in his youth he volunteered for the Israeli army. In 2009, Khaldi caused a stir when he said “By any yardstick – educational opportunity, economic development, women and gay rights, freedom of speech and assembly, legislative representation – Israel’s minorities fare far better than in any other country in the Middle East”. Khaldi is forceful on the need for Israeli minorities to have much stronger rights. But his sentiment is similar to that of one of the most prominent Israeli Arab journalists, Khaled Abu Toameh, who in 2009 said “Israel is a wonderful place to live and we are happy to be there. Israel is a free and open country. If I were given a choice, I would rather live in Israel as a second class citizen than as first class citizen in Cairo, Gaza, Amman or Ramallah”. Three-quarters of Israeli Arabs identify as Israeli and less than a quarter say they would be willing to move to a Palestinian state. Indeed, when Israel recently proposed transferring the Triangle Area (home to 300,000 Israeli Arabs since 1949) to the Palestinian Authority in exchange for settlements in the West Bank, there was overwhelming resistance from Israeli Arabs. Whilst in law, Israeli Arabs and Jews have equal rights, in practice there is significant discrimination against the Arabs. This is a mix of budgetary discrimination (e.g. Arab schools receive much less funding), unfair access to land (n.b. the Israeli state controls 93% of land and is not even handed) and asymmetric immigration rights (i.e. any Jew anywhere in the world can immigrate, whereas Palestinians abroad have extremely limited rights of return). Because Israeli Arabs are, mostly, exempt from conscription, they do not enjoy the substantial rewards (e.g. scholarships and housing loans) on offer to those who complete military service. However, the Druze, who form 10% of the Arab population, are an exception. They play a distinct role in Israel, being subject to military conscription, having substantial autonomy in running their won affairs and achieving high profile success in the army and in government. Another minority is the 10% of Arabs in Israel who are Christian, who are distinguished by success in education. However, the 80% of Israeli Arabs who are Muslim do less well than Jews on most measures. Their poverty levels are similar to the Ultra-Orthodox Jews. Some of the reasons for the relative poverty are similar to the Ultra-Orthodox -e.g. a low proportion of women working and large families. But it is important to remember why Israeli Arabs want to stay Israeli. And why 85% of them believe in Israel’s right to exist as an independent state. Compared to other Arab countries, Israel offers its Arabs higher incomes, utilities that work, democracy, stability, freedom from corruption and better access to welfare services. Just one fact amongst many that tells the story – Israeli GDP per capita is more than $36,000, compared to the West Bank & Gaza with less than $3,000 per capita. Israeli Arabs live on the side which is twelve times richer. But particularly since the Arab riots of 2000 in the Second Intifada, the Jewish population is frequently wary of its Arab citizens, fearing betrayal and entrenching segregation. The current conflict in Gaza is inflaming these fears and reinforcing dividing lines. Loyalties are polarised. As Abed al-Aziz Zoabi (the first Arab to serve as an Israeli deputy cabinet minister), famously said in 2000 during the Second Intifada “My country is at war with my people”.

My reason for reminding you that one-fifth of Israelis are Arabs? Because the most pressing issue is to decide whether a One State Solution can work for Israel – one which stretches from the Mediterranean Sea to the Jordan River, a country in which the Jews retain a majority but a much smaller majority. Until recently, this One State proposal has been largely associated with the extreme right-wing in Israel, based on simply annexing the Palestinian territories and facing down world-wide protests. Instead for the last 40 years, the Western led peace process has been based on a two-state solution – with separate nations for the Palestinians and Israelis, living as friendly and respectful neighbours. However, this solution is clearly not going to happen. Continuing to pretend that it is a feasible solution fuels the ongoing conflict in the region and excuses the dreadful progress in improving the lives and prospects of Palestinians. The last 40 years of the peace process has been like an endless and painful pregnancy, expected to deliver the twin babies of the two states – with all those echoes of Abraham and Sarah for both Jews and Muslims. But no successful pregnancy goes on indefinitely. If the peace process was subject to a scan, it would reveal that if there are still any live twins in the belly of the peace process they are at best Siamese. But instead, I think a honest scan would show that the second, smaller twin has either died or would not survive. To put it starkly, the West should accept that the Oslo Accords have gone the same way as Monty Python’s Norwegian Blue.

Any search for a solution needs to set aside the desire for historical justice, on either side. Both sides have suffered badly in the last 80 years, both within Israel / Palestine and internationally. There is no solution which can mutually satisfy the full yearning for historical justice. Nor is there any solution which gives each side a future free of the other. Both sides are there to stay and their future security and prosperity are inseparable. Finding the least worst option for both sides requires three bold steps. The first step is the Palestinians embracing Israel’s right to exist and its need to defend itself vigorously against its enemies. The second step is the Jews embracing the absolute entitlement of Palestinian Arabs to equal civil rights and shared prosperity. The third step is committing to a One State Solution which gives Israel the national security it needs and the Palestinians the civil rights and prosperity they deserve.

Given the balance of power, it is for the Israelis to take the lead on proposing a new solution. I think they could devise a “Hard Shell, Soft Centre” solution, which passes two tests:

(a) The first test is that a viable solution has to offer Israel the greatest guarantee of national security – in the eyes of the Israelis. That is a high bar. If a proposed solution doesn’t pass this test, there will be no sustainable progress. Israel will not play. It has shown that it cannot be made to play. Any progress, therefore, requires Israel being made (and perceiving that it is being made) as strong in the region as possible. This precondition may be unacceptable in principle to many in the region and around the world. But in practice it cannot be avoided. I don’t see how Palestinian independence (however attractive it is for other reasons) can pass this test. Israel will not tolerate the security threat of a weak and unstable Palestinian nation on its doorstep. It will want to vigorously control the security of the second state. It has bitterly regretted losing control of the Egyptian border with Gaza after it withdrew its military and settlers. It continues to tighten its grip on the West Bank and hasn’t been afraid to militarily intervene in neighbouring independent states like Lebanon to aggressively tackle security threats. There is little point in liberal protests that Israel should keep its nose out of the Palestinian areas. It won’t. And to be fair to the Israelis, their region is full of threat and uncertainty. Let’s remember that 32 nations don’t recognise Israel’s right to exist, that Israel has experienced full on wars with its neighbours and the threats of annihilation from Iran still echo around the region. And the level of regional uncertainty is getting worse everyday. This is a region in which nation states are collapsing – just look at the recent demise of Syria, Iraq and Libya. It is a region where the demographics of countries can change entirely almost overnight due to the movement of millions of refugees – e.g. Lebanon and Jordan are unrecognisable demographically from two years ago. And it is a region in which weak countries, as Palestine would inevitably be, suffer endemically from proxy wars between the richer or more powerful nations, e.g. the sponsorship of Hamas and Hezbollah. So, it is inevitable that Israel will insist on total security control of any Palestinian state and, more likely, it will prevent the birth of any such state and the risks it perceives it will bring. Therefore, a meaningful Two State solution has no foreseeable future. In terms of the options to maximise Israeli security, real and perceived, one that is often discussed is the Three State solution, in which the West Bank returns to Jordan and Gaza returns to Egypt. That is essentially the 1947 split of Palestine which lasted until the 1967 War. There have been times when such a solution would have looked attractive to Israel, when both Jordan and Egypt have been strong and respected neighbours. But, the point is that there have been times when this has not been true, e.g. when Hamas’ ally the Muslim Brotherhood was elected into power in Egypt in 2011. Whilst Egypt could absorb Gaza (and control of Gaza would help it tackle extremism in Sinai), it far from clear that Jordan could (or would be prepared to) take on the West Bank. There are of course 500,000 Jewish residents in the West Bank who are unlikely to want to become Jordanian. Even if those countries wanted to take back the Palestinian areas, it is hard to believe that Israel would feel at peace with two potentially hostile countries close up to their major urban areas, as they were in 1967. The One State Solution would mean that Israel could extend and deepen its security control to the external borders of the Palestinian territories. This would give it a Hard Shell. The major security question would be whether with One State from the River to the Sea it could secure internal control within those territories, which brings us to the next test.

(b) The second test is finding the solution which would maximise the civil rights and prosperity of the Palestinians. This would give the “Soft Centre”. Recently, Tareq Abbas (the 47 year old son of Mahmoud Abbas, head of the Palestinian Authority) declared himself in favour of the One State Solution, stating to Israel: “If you don’t want to give me independence, at least give me civil rights. That’s an easier way, a peaceful way… I don’t want to hate anybody. I don’t want to shoot anybody. I want to be under the law”. His 79 year old father acknowledged that support for the Two State solution is dominated by older Palestinians. Polling shows that whilst two-thirds of those over 50 support a Two State solution, less than half of 18-34 year olds support it. In exchange for the strengthening of its security in a One State Solution, Israel needs to respond with the maximum offer of civil rights and prosperity for the Palestinians. Creating One State will boost prosperity through removing internal restrictions. The World Bank has shown that Israeli restrictions reduce the West Bank’s GDP by 35%. The blockade of Gaza has crippled the country’s economy, where four out of five Gazans depend on foreign aid. But sharing prosperity will also cost Israel money – a lot of money. There is a massive need for investment in infrastructure and education. For example, Israel has nearly 1,000 kilometres of railways. The Palestinians have none. Palestine has already had far more aid than the Marshall Plan gave to Europe. But any political settlement must include a clear and massive investment plan, with an equal commitment of Israeli and international funding. In the context of One State, the granting of most civil rights (freedom of expression, freedom of internal movement, equitable funding in education, equal access to land and building permits, etc) should be straightforward and immediate. Israel should have to put these equal rights into its Base Law. There are a variety of options about military conscription (e.g. continuing the exemption of Israeli Arabs or extending the community based agreement to conscription of the Druze). The most difficult issues will be those which undermine Israel’s ability to remain a Jewish state, whilst being a democracy. That comes down to demography. Whilst polling amongst Israeli Arabs has shown that three-quarters would accept “A Jewish democratic state with equal rights for all minorities”, this is clearly much less attractive to the Palestinians. For a long time Israelis rejected a One State solution because of fears of the “demographic time bomb”, in which Arab population growth was outstripping that of the Jews. But those trends have turned. Fertility rates are now similar and migration has favoured the Jews. There is much dispute about the actual population of the Palestinian territories. But if we accept the official figures, a One State solution would increase Israel’s population from 7.8m to 12.1m, with the Arab percentage rising from 20% to 45%. (If just the West Bank joined Israel the figures would be 10.5m and 37%). A lot of the political issues could be addressed by decentralising power within the country, given that populations (even within the current Israel) are highly segregated. But at a national level, Israel would face the choice of either staying a Jewish country or becoming secular and multi-cultural. Ideally, the Greater Israel could be a regional beacon of a multi-cultural, liberal and secular democracy. That should be the ask of the international community. But I suspect that Israel is not going to accept that in the foreseeable future. So we need to find a less than ideal solution. Israel could protect, or even extend, the Jewish majority (as it does now) by controls on immigration, with discrimination in favour of Jewish immigrants. This would be highly offensive to the Arabs, but no worse than the status quo. It could also vary the electoral franchise to manipulate a Jewish majority, e.g. with differential voting ages. Again, this offends all our liberal sensibilities. But compare it to what is happening in the murderous chaos across the region and more particularly within Israel / Palestine and ask if it is a price worth paying?

The worst thing about the current troubles in Israel / Palestine is the sense that there is no better future on offer, just a state of permanent war and an international community unable to accept the death of its preferred option of Two States. Instead this “Hard Shell, Soft Centre” strategy offers Israel much greater control of its security in exchange for offering near-equality to the Palestinians. It accepts the power which the Israelis insist on having over the Palestinians, but in exchange it requires them to take responsibility too. It is far from perfect as an option and will be offensive to many on both sides. But with the Middle East imploding, a new future has to be found – not just for those living in Israel and Palestine but to inspire people across the region that liberal multicultural democracies are the route to peace and prosperity. Thinking of another time when necessity required action not perfection, I am reminded of Sir Robert Watson-Watt, whose invention of radar turned the tide in Britain’s fight agains the Luftwaffe in the Second World War. Watson-Watt fought for the “cult of the imperfect” and famously told the Government to get on with his solution – “Give them third best to go on with; the second best comes too late; the best never comes”.

What Nigel Farrage has got right … and the need for radical political reform

“He operates in the gulf between the public and us here at Westminster. And there’s plenty of room for him there.” For most people in the UK there is no need to explain who is being described here. For any foreign readers, it is a quote about Nigel Farrage, leader of the UK Independence Party (and it was said by one of the UK’s most distinguished Parliamentarians, Frank Field). However, if the word “Westminster” was replaced with “Washington DC”, or “Brussels”, or “Paris” etc, then it could easily refer to any of a growing number of anti-establishment parties – the US Tea Party, the French Front National, the Spanish Podemos or the Greek Syriza. There is clearly a crisis in democracy in the West. Gallup’s global polling shows that in much of the West the majority of the public has lost confidence in their form of national government. This is at its most dramatic in the Mediterranean countries, e.g. in Spain where confidence has fallen from 58% in 2008 to 18% in 2013, although this still puts it ahead of Italy, Greece and Portugal! National government in these 4 countries enjoys lower public confidence than in the Democratic Republic of the Congo! Whilst confidence remains high in some Nordic countries (e.g. Norway at 66%) and above 50% in several other western countries like Canada and New Zealand, it is also very optimistic in many developing countries such as Ethiopia (77%), Ecuador (62%) and India (56%). But the majority of  British people lack confidence in national government (just 38% are confident), a similar level to the French, Danish and Japanese. It’s better than in the US (29%) but well behind Afghanistan (48%)! Indeed, 4 out of 10 British people lack confidence even in the honesty of national elections, albeit that’s better than in the US where it is 6 out of 10. In the UK, public satisfaction with the leaders of the 3 main political parties has reached a historic low, with the combined scores of all 3 being -22%. One of the most striking manifestations of public alienation is voters staying away from the ballot box. For comparison it’s worth noting that the X Factor Final typically sees 1 in 4 of the public voting for their choice. The recent European elections saw just 1 in 3 UK adults voting – a similar level to that achieved in recent local government elections. Turnout is much higher at the General Election, but in the last decade only 60-65% of adults have bothered to vote even at this level, compared to say the 1950s when up to 85% would vote. The two most popular UK politicians are Nigel Farrage (who is anti the political elite) and Boris Johnson (who looks like the elite, but is directly elected as Mayor of London). We should look for clues in their popularity.
However, these issues of alienation run deeper than politicians would like to believe. It’s not just nihilistic cynicism, recession fatigue or unpleasant racism – although there are elements of all of those. It seems that people are concluding that, for all the promise of democracy, ordinary people appear to have little or no impact on their Governments. We now know this is true – at least in the US, for which we have data. Earlier this year, Professor Martin Gilens of Princeton University published very powerful research which showed that “ordinary citizens have almost no influence over what their government does in the United States”. Gilens had looked at the history of almost 2,000 policy decisions over a 20 year period. He found that the economic elite ( corporations, business and the richest 10% of people) got their way two-thirds of the time, twice as often as the median citizen and sixty times more often than the bottom 10%. This mattered most when people at the top and the middle disagreed – e.g. over tax levels and the regulation of business. Guess what? The people in the middle tend to lose the argument. Even when there was 80% or greater support in the country for a particular policy change, the change mostly didn’t happen. That was because policy debates were heavily influenced by interest groups. Interest groups were dominated by the economic elite (e.g. business and professional associations). In the US, the preferences of business interest groups negatively correlated with the majority preferences of the US public. Business interest groups were twice as influential as mass interest groups – mainly because they were twice as active. And interest groups (the research shows) were mostly against change. The elite preferred things as they are – by definition, it seemed to work for them! So the lack of majority power and a status quo bias meant that even when large majorities wanted change, they often didn’t get it, unless the economic elite wanted it too. I haven’t seen similar research for the UK, but I suspect it would make uncomfortable reading for most politicians, probably with the exception of Nigel Farrage, who might suddenly have an evidence base for his anti-elitist rhetoric.

So, if these are deep problems, what could be done? The political class needs to have a radical think about constitutional reform. Now, I have catholic tastes in my existing friendships across the political class. Some are passionate about equality, others about free enterprise; some have invested their lives in global development, others in parochial pavement politics. But I must admit I have always crossed the road to avoid constitutional reformers – those whose lives are devoted to voting systems and political structures. The constitutionalists always remind me of those hi-fi buffs who obsess over expensive and obscure woofers and tweeters, but then turn out to like nothing more than Simon and Garfunkel or Celine Dion! Like many, I have rather lazily assumed that the British don’t really go for constitutional change. Like many, I have a vague sense that our constitution has organically grown over centuries to give us a stable, if occasionally eccentric, system. But, of course, much of this history is pretty recent. A hundred years ago on the eve of the First World War, 16 out of 20 people didn’t even have a vote. The last thirty years have in fact been a period of hyper-active, if completely incoherent, constitutional reform. We have had: devolution to Scotland and Wales; self-government in Northern Ireland; proportional representation in local government in Scotland and London; the abolition of metropolitan government in our major cities; the creation of Select Committees; and, the widespread elimination of county government. In just the last couple of years, we’ve had referenda on an Alternative Voting System and Elected City Mayors, along with another intense, but failed battle to reform the House of Lords. This year we have a referendum on Scotland leaving the UK and within 3 years we’re likely to be voting on whether to remain in the European Union. So clearly the British do do constitutional reform! However, it’s all one sort of democracy. Whether it’s devolved, national or international, our ability to influence things comes (for most people and most types of voting) through parliamentary style representation. By and large, our democracy is representative – we choose someone to represent us in a council, a national parliament or an international parliament and then they go on to join-up with others and choose their leaders, who in turn become our leaders. So, we have, mostly, an indirect democracy. And where we don’t have proportional representation, then the first past the post system means that voters in safe seats have little individual influence on the national system. My eldest (and politically active) daughter who gets her first General Election vote in 2015 has realised that living in the Henley-on-Thames constituency removes her right to have any impact on whether Ed Miliband becomes Prime Minister. But even if she had a way to help him into office, he could easily be replaced by his party colleagues without reference back to the electorate. Given the limitations of the national voting system, what about all the other votes that express the people’s will? Everyone has at least 3 votes – local, UK and European. Some have 4 (e.g. in Scotland or London) or even 5 votes (e.g. in shire county areas, with county, district and parish). But with the exception of the devolved administrations (like Scotland or London), the other votes (local government and European) too often tend to be poorly attended protest votes against the national government of the day, rather than real votes about local or European issues. I have mixed feelings about my inability to name the leaders of either the county or district council leaders where I live. On the one hand, it’s embarrassing as I take much more interest in politics and government than most. On the other, it’s reassuring that I am part of the 92% majority of people who can’t name their council leaders. The majority of people with an Elected Mayor do know who runs their area – i.e. they have a direct democracy. ( Given my political anorak habits, I can actually name many of the Elected Mayors up and down the country!)

If we are to re-engage the public, we need to offer some radical solutions. In order to stimulate this debate, here are 4 straw men. I am not arguing for them, just arguing that we need to start arguing:

1) Public Juries

A first step could be to give ordinary people a chance to take part in government. There are many decisions which politicians have decided to give away to independent panels, experts and committees. There are national structures (e.g. Low Pay Commission to decide on the Minimum Wage level) and local structures (e.g.panels to decide on the adoption of children). These processes are typically populated by the great, the good and the worthy – the elite. One way to reinvigorate democracy would be to abolish this remote and elitist approach and replace it with “Public Juries”. Members of the public would chosen to serve on these juries, based on a representative demographic sample. Those chosen would be obliged to serve, just as they are obliged to do jury duty in the legal system. There would be a judicial style process chaired by an impartial public servant and the jury would hear arguments from a variety of sources before making a decision. This is not about consultation – it is about replacing the “quango-cracy” or “magistracy” with other decision-making bodies. The jury decision would have the same status as the decisions made by the body which the jury had replaced – i.e. it might be the final decision, or the formal recommendation to Ministers. Bodies which could be replaced by this approach include: determination of the National Minimum Wage level by the Low Pay Commission; the setting of interest rates by the Monetary Policy Committee; decisions by NICE on which treatments should be funded by the NHS; recommendations by the Migration Advisory Committee on immigration levels; recommendations by the Advisory Council on the Misuse of Drugs; recommendations by the Honours Committees on who should get knighthoods and medals; local decisions by Licensing Panels about the sale of alcohol or the numbers of taxis; decisions by economic regulators about consumer prices versus investment in particular regulated industries, such as water; etc. In addition, this approach could be used for a wide range of difficult decisions taken by Ministers, where it is tempting for Ministers to avoid hard choices, e.g. local health service rationalisation plans. Juries might also replace various appeals processes (e.g. for planning applications or immigration). And public juries would offer a better solution than peer review for judging the behaviour of politicians themselves (e.g. on expenses issues). Some of the juries might be small (e.g. for an adoption) or large enough to be nationally representative (e.g. on the Minimum Wage). But (I hear some people say) how can the ignorant masses decide on these highly expert and sensitive topics? Well, the jury approach (trial by one’s peers) works well in our justice system. And most of these decisions are about justice, making trade-off decisions and giving each side a fair hearing. I am envisaging that, as in a trial, there is a moderated opportunity to hear both sides of a case before making a decision. Where Public Juries have been used ( in diverse locations from China to Texas, and on diverse topics from health reorganisation to clean energy) the public changed their minds substantially as they heard the evidence and engaged in the debate. In these debates, it is the role of experts to make their arguments and it is for the people to make the decisions. Participative democracy like this could re-engage the public. It would be possible to allow the public to follow the case (online or on TV). If future decisions are well publicised, there could be a big build up in the public domain, e.g. social media campaigns. And if all this sounds a bit exotic, it’s worth remembering that this was the form of democracy favoured by Aristotle. The Kleroterion was a Greek lottery machine which randomly selected citizens to join a Council to govern Athens. The idea was to avoid the oligarchy of a political elite. It seems unlikely that Nigel Farrage will mention Aristotle (unlike perhaps Boris Johnson) but they seem to be on the same lines.

2) Directly elected European President

A second step might be in Europe. Even the most passionate Europhiles must despair about the democratic mess which is the European Union. There are European elections. But they are for the bit of the European government which has the least power – its Parliament. Day to day power rests with the European Commission which is run by ex-politicians, who are are appointed through the patronage of individual national governments. The big decisions sit with the Council of Ministers, the 28 heads of government who horse-trade their way to compromises which leave none of them satisfied, and none of them feeling accountable to the public. (I gave up trying to explain all this to my newly-voting daughter, who concluded that a UK vote was just about who should get a domestic bloody nose from the voters.) Let’s assume for a minute that we’re staying in the European Union. Let’s also assume that the Council of Ministers reach a fresh agreement on what scope and powers the EU should have (e.g. its role in agriculture or immigration). With these settled, we could then replace the Parliament and the Commission with a directly-elected President. The European public (not the dining rooms of Brussels) would choose their President, using a similar voting system to the French Presidential elections, but with elections held every 3 years. The President would then choose his or her own Commissioners. The Council of Ministers could change the scope or powers of the President and would set the overall budget. But after that, the President would be directly accountable only to the people. He or she would have the option to hold electronic referenda on big issues, or to appoint Public Juries. Assuming that the EU continues, there are huge and urgent Europe-wide economic issues on which to engage the European public (via direct election, referenda or juries) if Europe is to thrive in the new global economy. At the moment, there is a lack of the strong political leadership needed to help the European public understand and accept the challenges they have to face. It is better to decide cleanly what, if anything, we want decided at the European level and then create a directly-elected representative to wield that power (be it broadly or narrowly defined) in a strong and highly accountable way.

3) Directly elected Presidents for the UK nations

A third step might be to have directly elected Presidents for each of the 4 UK nations (Scotland, NI, Wales and the UK). In effect, this makes a formality of what is actually going on in elections. It’s clear, for example, that, in spite of the personal merits of local Members of Parliament, the 2015 General Election will boil down to whether the public wants “President” Cameron, Miliband, Clegg or Farrage. So why not let people elect them directly and then let the successful candidate choose who is in their government (as Obama does in the US)? If nothing else, it would allow people to have a national vote for a national government, where every vote counted, and it would require the winner to have the support of the majority of the electorate. Two features our Westminster system lacks. But how do we avoid the problem that directly elected Presidents are often blocked by other branches of Government? As we know, the US constitution was inspired by the Jeffersonian principle of giving government the least amount of power and then spreading this power across the greatest number of bodies. In the US (and elsewhere) we know this leaves gridlock and a public confused about who is in power and who is accountable to them for what. But if Presidents could stay highly accountable to the public, then would we even need the other branches of government – the lower chambers who legislate and the upper chambers who refine the work of the lower chambers? Instead, could we not replace these others branches with direct input from the public? For example, maybe big annual decisions (such as the Budget) or major primary legislation should be subject to a public online referendum. It ought to easy to make online voting easy, secure and, if necessary, frequent. It is no longer the case that communities which are days away from their capital need to send representatives to follow events and vote on issues. Modern media brings government and the people together in real time. In terms of shaping and debating legislation, maybe Presidents would be obliged to put all new draft legislation out to pre-legislative scrutiny. The power of the elected executive would be moderated by the people, in real time, rather than by other elected representatives, competing for legitimacy. (It’s entirely feasible that a ceremonial monarchy continues in this scenario, if that’s what the public wants).

4) Russian doll Mayors

Elected Mayors are a good thing. Like the Presidential model, having Mayors gives the public a direct vote for who they want to run the area and requires the winning candidate to secure a majority of the electorate. The challenge is that we need Mayors at different levels. On the one hand, there is a serious lack of big, strategic Metro Mayors for our larger conurbations. We have one in Boris. Should we have more? This could be for each of our biggest city regions (e.g. Birmingham, Glasgow, Liverpool, Manchester, Newcastle, etc). But we also need them at a very local level. In other countries, e.g. France and the US, there are mayors for very local areas, including the 37,000 communes of France and many of the 20,000 US municipalities. Just as in London, we have a Mayor for Hackney and a Mayor for London as a whole, fans of Danish TV drama will know that in Copenhagen local areas elect a Borgmester for their neighbourhood and an Overborgmester for the City as a whole. We could see these as Russian doll Mayors – we could have as many as we liked, with each smaller geography siting inside a large one. However, I suspect that for most people 2 would be fine. Again, rather than having lots of councillors to limit the power of Mayors, their executive heft could be moderated by direct public participation in online referenda or public juries on major decisions.

These are just a few ideas for reforming our political structures. There are many other, and probably better, ones that we should we considering. Indeed, there are other ideas elsewhere on my blog (e.g. hypothecating taxes, for example for the NHS) which could make a real difference. The straw man ideas in this post are about trying to move away from the indirect democracy which offers the public infrequent opportunities to express a view about who they delegate to represent them in a rather complicated, distant gathering of the political elite. Instead, these ideas aim to stimulate a debate about giving ordinary people more opportunities to directly express their opinions, to directly choose their leaders and to delegate their decisions to their peers for complex decisions best suited to a jury. If such ideas worked, they might reconnect government and ordinary people and reignite the political battle of ideas about what kind of future we want to pursue.

Five steps to save what really matters in the NHS and lose what gets in the way

Like the great majority of British people, I am immensely proud of the NHS and instinctively defensive when it is attacked. And yet, I am not sure many of us are very clear what we think the NHS actually is. Sometimes people think that it’s all a public service, but up to a third of the NHS funded staff work in profit-making private businesses (GPs, dentists, opticians, etc). Sometimes people mistake the professionalism of medics for the ethos of the NHS, when there is no evidence that medics in other countries are any less professional, or indeed that the same NHS medics are any less professional in their own private practice (e.g. hospital consultants). Many people, who have never known any other provider than the NHS, associate medical innovation and progress with the NHS, marvelling at the improvements in, for example, cancer care over the last 30 years, but without realising that the same (amazing) improvements have been made in other countries, often, sadly, to a greater extent. Much of what we admire about the NHS is what people in other countries admire about their own health services, public or private. It’s just that for 93% of people in the UK, the NHS is the only health service that they consume, so their admiration goes to the NHS. However, I am very clear what I care most about in any debate about health and the future of the NHS. Any visit to the USA always reminds me of what is actually truly special about the NHS. And that is the wonderful principle that people in the UK do not have to worry about whether they can afford the health care they need when they need it and the costs of that health care are paid for through a progressive tax on everyone. A textbook case of “to each according to need, from each according to their means”. Of course to many Americans (and some on the right in the UK) this sounds like socialism. But it’s unthinkable that we would move away from this principle. It’s an important moral principle that healthcare should be provided through social solidarity, across generations (as it’s mostly consumed by the very old) and across income groups (as the better-off pick up most of the tab). However, there is also plenty of pragmatic economic justification for this approach. Effectively, we are pooling risk. None of us know who will have the greatest needs. Nor do we know when that need will occur. So it makes sense to create the biggest risk pool possible. For me, then, what I want to defend, protect and enhance is the NHS as a national health insurance scheme – keeping healthcare free at the point of access, paid for by those who can most afford it in a major act of social solidarity, the key obligation that we decide to have to each other. That’s the kind of principle worth going to war to defend. But that’s the end of my socialism in terms of the NHS. I don’t accept that in order to have social equity we need to mirror other aspects of the Soviet system. It’s pretty clear that the current NHS provision needs a revolutionary dose of both glasnost and perestroika. On the other hand, there has been a lot of good reform, especially in the creation of new types of institution. But this reform has been hobbled by a lack of clarity of about what is and isn’t the NHS and an overwhelming and negative culture of bureaucratic paternalism, which aims to plan out the lives of both medics and patients, rather than letting them find their relationships in a competitive market. So here’s my thoughts on how to build on the current direction of travel in the NHS but make a revolutionary leap forwards, saving what matters in the NHS and destroying what hinders progress.

I suggest a 5 step approach:

1. We could declare that the NHS is simply a health insurance scheme – no more, no less. It would not be an employer, a provider, a planner of health services, a trainer of staff, etc. It could be known as NHS Insurance (NHSI). Its mission would be to fund high quality healthcare, free at the point of use to everybody based on need and funded through the tax system. We would ,therefore, maintain what is best about the NHS – that no-one should worry about whether they can afford the healthcare which they need when they need it; that healthcare is given to those in need, funded by those who can afford it. NHSI would set out clear, national entitlements as to what was covered by the insurance scheme, removing local policy choice. There would be vigorous political debate about the scope of the entitlements and the levels of funding provided. There would be an independent watchdog (probably, the existing NAO) to see whether NHSI achieved value for money in the prices it paid for health services and the clinical outcomes. 

2. We could take the NHS out of general taxation. Instead, National Insurance (NI) taxes could be renamed “NHS Insurance”. The rates of the NHSI would be set by the Health Secretary, rather than the Treasury. The money raised by NI (just over £100 billion per year) is almost exactly the same as the cost of the NHS. NI already looks like a health insurance scheme – it is funded out of earned income, with contributions from both workers and employers. It is a progressive charge – nothing is paid on the first £8,000 of earned income and then it is charged to employers (13%) and employees (12%) up to £42,000. After that, it is charged at 2% of income. Clearly there is scope to increase the rate above £42,000 as and when more money is needed. There is also the opportunity to remove some of the current exemptions and lower rates – e.g. for the self-employed and high income older people. The progressive nature of the insurance scheme could be fixed in primary legislation, but the details subject to political decision-making by serving Health Secretaries. Parties could therefore campaign to raise or decrease, or vary NHSI charges, quite separate from the general approach to taxation. This would focus the debate on how much people want to pay for healthcare. The current cost of the NHS is £2,000 per person per year. But as NHSI (replacing NI) would come out of earned income, the cost to those in work will have to cover children, the retired and working age people not in employment. This means that an average working age household, with a combined income of around £40,000 per year, would pay about £4,000 out of their salary. Their employer(s) would pay the same again. Both could be shown on the payslip – showing the average household that £8,000 (or c£150 per week) was being paid for NHSI. This should focus everyone’s mind on the cost of NHSI and help the public connect more clearly with the debate about “more, or less, money for the NHS”. 

3. As the NHS would no longer be a provider, we could transfer the ownership of NHS services to the staff who provide them. The majority of NHS funded organisations are already privately owned by the people who provide them – dentists, pharmacists, GP practices, opticians, etc. We could complete that journey for the other 1m staff – those working in hospitals, ambulance services and community services. At the moment, the ownership of many of these NHS services sits in a twilight zone – who owns a foundation trust? We could set a deadline for all current services to be taken over by employee-owned organisations. This could be, for example, all of a large hospital being taken over by its staff. Or smaller groups of staff (e.g. a pathology lab or a clinical department or a community mental health service) could opt out on their own. It maybe that some hospitals will want to make the hospital facilities a separate business from the staff who work in it ( in the same way that most private hospitals work). The new organisations could be for profit (like GPs or dentists are now) or not-for-profit (as BUPA is now), as the staff wish. The new organisations would, in the future, be able to merge, acquire or be acquired in the future, but only if a majority of staff shareholders vote for it. This is to stop a few people profiting from selling out their colleagues. 

4. Like other health insurers, NHSI would accredit providers, i.e. those it is willing to fund. This would cover the prices for services and the quality standards to be met. Accreditation would be open to any providers to offer any service – former GP practices might want to offer diagnostic testing in competition with hospitals; hospitals might want to offer GP services; a mental health practice in the North might want to expand in the South West; pharmacists may decide to offer a wide range of GP services, or maybe just a minor ailments services; etc. This is similar to the current philosophy of “Any Qualified Provider”, but with much more incentive for these now private providers to compete for service. Quality would be judged by the Care Quality Commission, as now, but NHSI would also need monitor outcomes and costs, taking over the role of (and people in) local Clinical Commissioning Groups. Where providers with critical facilities got into financial trouble or where competition was ineffective in a local area, the existing regulator, Monitor, would step in to protect consumer interests. In fact, the current NHS organisational structure would work well in this new world – it was designed to go in just this direction. 

5. Clearly, there is a risk that if ownership is fully transferred to those who provide the services they will put their own interests first, rather than patients. An obvious risk is that where medics or facilities are in scarce supply, the staff owned businesses will put up prices and increase their incomes. The best medium term way to avoid this is to reduce scarcity. The key scarcity is staff. The UK has one of the lowest numbers of doctors per head of population in Europe. In fact, it comes 24th out of 27, only managing to beat Poland, Romania and Slovenia. Austria has nearly twice as many doctors per head of population as the UK. Germany, Italy, Spain and Sweden all have more than 40% more doctors. The situation in the UK has got better – there are now 138,000 employed doctors, compared to just 102,000 10 years ago. Supply has grown through a mix of more training places and immigration – a third of hospital doctors are now foreign born. The current planned economy of the NHS limits the numbers of doctors – by fixing national pay levels it limits the number of jobs. It also sets pay at a high level. For example, in the UK GP partners earn something 3.4 times the national average wage, whilst in Australia they earn 1.7 times. That’s twice as much, in comparative terms. Whilst much of the problem in the absurdly expensive US system is high pay for doctors (e.g. orthopaedic surgeons earn twice as much in the US as they do in the UK, where they are the highest paid of doctors), in some countries (e.g. in central Europe) doctors earn less than the national average. There is no shortage of people, with the necessary talent, wanting to be doctors. So, we should push for a major expansion in medical training (e.g. 100% more doctors being trained?). Partly, this cost will be absorbed by student loans, partly it will be overseas students paying their own way and partly by NHSI on the basis that it will reduce future costs by increasing supply. A major increase in supply should encourage more people to go into unfashionable medicine (which has shortages) and the demise of national pay rates (given that all provision is private in this new world) means that doctor pay will be set by the market and doctor income will vary according to what they deliver.

5. After these changes, then we could get really radical. We could make it a truly patient-driven NHS. This is the current mantra of NHS managers. But they then often want to do the opposite – to have a “driven-patient” approach, creating pathways down which they wish to herd their sheep. A good example is the current NHS focus on trying to stop patients turning up at hospitals at their own convenience and getting them access to 9-5 community services instead. A patient-led approach would follow people’s revealed preferences – they are happy to visit a major outlet that offers better convenience and the promise of immediate attention. They do it every week at supermarkets. The average person only has 6 miles to get to their A&E, which has lots of fixed costs to sweat and assets to offer. It would be possible to offer a wider range of services on those sites, instead of trying divert demand away. In the current old world, NHS managers (of various kinds) sit around trying to plan out their options. I am not suggesting that they now plan out a new set of services on hospital sites. The key to this is to eradicate the bureaucratic purchaser or planner of services, currently known as commissioners. Instead, we could let patients choose what they want, in response to what competitive providers offer. NHSI would pay for the service, as chosen by the patient. In effect, we would be offering everybody (poor, average income or better-off) what today only the rich can have. In a new world where all health organisations are privately owned (albeit mostly by the staff who work in them) and all organisations are free to offer any (accredited) services to anyone they wish, we could let rip with patient choice. There could be 4 ways to put patients in charge:

(a) Direct access immediate services – This could include all those services where the public just wants to be able to turn up, find out what’s wrong with them and get immediate treatment. This includes GP services, paramedics and Accident and Emergency. For these services, we could say that patients can go anywhere they like – to any accredited provider. Rather than having to register with (and stick with) a GP, they could book an appointment anywhere, as they would for almost any other professional service in the private sector (e.g. seeing a solicitor). This would allow those who just want to see a doctor to see one. It would not prevent people who want it from sticking to the same doctor. The choice would be theirs. This would mean replacing the annual capitation fee with a fee-for-service, allowing the GP service to bill NHSI for seeing the patient. It would prevent the rationing of healthcare by GPs by how many of their (average) 1,575 patients they choose to see in a week. Clearly, it relies on all accredited providers being able to see health records. This may take a few years, but it is getting rapidly easier to achieve. (There are lots of ways to achieve it, including encouraging people to own their records on a cloud-based system, giving access to providers as they wish). Similarly, patients could go to any accredited A&E service. And of course, hospitals would be free to develop their A&E services to offer 24-7 GP services, whilst GPs could reciprocate with services for minor injuries or crises for those with long-term conditions; accredited pharmacists could offer a range of GP services, as could accredited mental health therapists. In all cases, providers would need to attract patients to have any revenues at all. Patients would have unlimited access to these direct access services, as they do now, funded by NHSI.

(b) Specialist diagnostic services – The second category of services is where patients are referred (by the direct access providers, e.g. GPs or A&E) for specialist diagnostics. This might be direct referral for tests (e.g. MRI scans). Or it maybe to specialist consultants for their opinion. Just as in private health insurance, patient access to these services would have to be through accredited referral. But once referral is given, patients could be given the same choice as they would get now with private insurance. They would be able to go to any accredited doctor or provider. Competitive providers would directly market to individual patients, offering, for example, faster access to testing, if people are willing to use facilities at weekends or evenings. Alternatively, many patients may just take a recommended routes from their direct access medic doing the referral.

(c) Planned services – Once a patient knows that he or she needs a time-limited course of treatment or particular service they would then have a choice about who they got that from. This would include operations, oncology, maternity, mental health, etc. They would choose accredited doctors or providers in the same way that they would with private health insurance. Again, providers would market themselves to individuals and compete on quality and convenience.

(d ) Long term conditions – The largest part of NHS spending goes on people with long term conditions. These are chronic diseases which can’t be cured, but which can be managed. This includes, for example, heart disease, diabetes, MS, arthritis, dementia and respiratory conditions. Government estimates that this is 70% of NHS spending. There is strong evidence that what works here is giving patients access to integrated providers – e.g. to an integrated dementia service (which includes primary, community and hospital inputs). There is also a philosophical commitment to given patients control over the health service they receive and more ability to self-manage their conditions. However, this is too often just rhetoric. A simple way to move this forward would be for NHSI to give patients with a LTC control over the budget. They would have to choose an accredited integrated provider – a prime contractor. That might be a hospital or a GP practice or a new type of organisation (e.g. Acme Diabetes). That provider would be expected to provide a full range of services (from regular checks through to urgent care) and they would need to configure professionals, technology and drug treatments into packages of care that attracted patients. They would have to resolve all the fragmentation across current providers into a simple package of care. Again, providers would market directly to patients and NHSI would set per capita prices for the annual treatment of the individual.

I would emphasise that these 5 steps fit easily into the journey already underway in the NHS. But the way that they fit together would remove the bureaucratic paternalism which currently gets between intelligent patients making their own choices and responsive medics creating attractive solutions to win the business of those patients. These suggestions therefore could accelerate the pace of the journey underway, but without jeopardising what I care most about in the NHS, the principle of access according to needs, payments according to means.

Sorting out the public finances – Part 3 : Re-nationalisation, pensions and infrastructure

One of the funny things about democracies is how sometimes there can be a cross-party consensus amongst politicians that the public is wrong on a major issue and can be safely ignored by them, one and all. Opinion polls continue to show that 70% of the British public want to renationalise the privatised utilities – water, gas, electricity, railways. This is not a rejection of capitalism – they are clear that they don’t want to renationalise British Airways, Rolls-Royce, BP or Jaguar Land Rover. But they clearly feel that our national infrastructure should be under public ownership. And yet even Ed Milliband, the most overtly left-wing and populist Labour leader for thirty years, see such ideas as beyond the pale. This generation of politicians (and senior civil servants and journalists) has grown up accepting that the Thatcher settlement is inviolable – that to undo what she did would take us back to the 1970s. Even those who do argue for renationalisation seem to accept that it’s an unaffordable pipe dream. But what if the public is right? What if it’s time, after 30 years, to think again about nationalisation? Maybe each generation needs to think, pragmatically, about the right solution for its era, rather than fetishising the solution to the last one? And what if renationalisation is perfectly affordable and could actually improve the public finances?

In this political debate, we are often stuck in the narrative of thirty years ago. A Cold War narrative, in which domestic politics was just part of a black and white global struggle between Communism and Capitalism. And, as we know, Capitalism won. Like the fall of the Berlin Wall, the privatisation of our national infrastructure was an icon of this victory. Not only could even our drinking water be privatised, but millions of British people could buy shares for the first time as the privatisations made capitalism truly popular. And clearly, privatisation achieved a lot. £100 billion of investment into our water infrastructure. Being able to get a new telephone line when you wanted it, rather than going on a long waiting list. But thirty years later, it is worth revisiting this narrative – the world is no longer a black and white struggle. In a world of state capitalism and after the 2008 humiliation of the uber-liberal economists, are there are new types of nationalisation to offer the public?

Indeed, the “private sector” which owns much of our infrastructure is in fact often the public sector of other countries! For example, our largest water company, Thames Water, is owned by the governments of China and Abu Dhabi. Or look at the UK government’s recently agreed thirty-five year contract with the “private sector” to build a new nuclear power station in Somerset, guaranteeing a revenue of over £80 billion, with a minimum price for the power produced, set at roughly twice the current market price. Such contracts have been deemed necessary to secure private investment in long-term assets. There were two “private sector” investors in this deal – the French government (owner of EDF) and the Chinese government (owner of the two Chinese nuclear corporations). If the “private sector” is not a foreign Government (through a government owned company or sovereign wealth fund), then it is often a foreign public sector pension scheme. For example, London’s High Speed Railway to the Channel Tunnel is owned by two of Ontario Province’s public pension schemes. Globally, there is now some $50 billion of overseas public sector pension funds invested in infrastructure, mostly from North America but also from north European countries. The trend is growing – earlier this year, the world’s biggest pension fund, the Japanese Government Pension Investment Fund, allocated some of its giant £750 billion fund to a joint venture with the Ontario Municipal Employment Retirement Scheme to buy up Western infrastructure. However, these funds do not like to build new infrastructure – they look for mature assets in developed countries producing strong financial returns from low-risk assets. They often find these in the UK, which attracts a fifth of all global pension fund investment in infrastructure. Our regulators have become very good at ensuring that overseas investors get the low risks and strong returns that they desire. (But they have lost the confidence of the public. For example, polls suggest that less than one in five people now trust energy companies to act in the customer’s interest.)

For all the debate about nationalisation, it is worth noting that, in fact, much of our infrastructure is not privatised at all. Network Rail, which owns and operates England’s track, was officially reclassified last year as a part of the public sector, bringing to an end a long and unhappy period clinging by its finger tips to its private sector status. Scottish Water has never been privatised. Nor has Northern Ireland Water. The UK’s motorways are owned and operated by the Government, paid for by taxes, rather than charging tolls, like many countries in Europe. Many of our airports are still owned by local authorities, including Stansted, Manchester and Birmingham. Councils still own nearly 2m homes.

So, if this debate about nationalisation or not isn’t so black and white, what could a new narrative look like? After the Great Financial Crisis, perhaps we should think about all this in terms of national balance sheets. How can countries match their future liabilities (like future pension costs) with their assets (like owning water companies which produce predictable cash flows to cover those pension costs)? This is, in effect, what other countries are doing when they are buying our infrastructure assets and companies. They are anticipating future liabilities (e.g. pension costs for Canadian public servants or social costs in the Middle East when oil revenues dry up) and acquiring assets which can cover those liabilities. They are putting the resources on their balance sheet to productive use. If this makes sense for them, why aren’t we doing the same? Infrastructure is all about assets (creating investments like roads which fuel economic growth) and liabilities (like repairing railways when they wear out, or replacing power stations when they reach the end of their life). Given the UK consensus that we need to invest massively in our infrastructure, after decades of under-investment, we are in danger of seeing infrastructure merely as a lot of liabilities ( hundreds of billions needed for power, rail and roads). This comes on top of many other liabilities on the national balance sheet, not least the £900 billion of future public sector pension liabilities which are unfunded. Add these to the £1.5 trillion of national debt predicted for 2018 and the future, like that of much of the West, looks gloomy. It is pretty challenging. But if we think about the nation’s balance sheet in a more joined-up way (across the public and private sectors and across assets and liabilities), we can begin to see things differently and, potentially, more optimistically.

One way to do this would be to see if we can solve four problems with one solution. The first problem is that we need massive capital investors, with a long term commitment to improving the UK’s infrastructure. The second problem is that we need our public sector pensions to be properly funded. The third problem is that we need the owners of the UK’s infrastructure to be acceptable to the British public and trusted by them. The fourth problem is that Government sits on hundreds of billions of assets on its own balance sheet, doing nothing with them. In finding a single solution to these four problems, we have some strong starting points. We have a regulatory system for our utilities which is good at guaranteeing investors a predictable and healthy return on their investments. We have the examples of overseas public sector pension funds, paying premium prices to get a slice of the UK infrastructure market to match their future liabilities. We also have the examples of overseas governments putting the current wealth on their balance sheet to productive investment in the UK. These starting points suggest that one solution to the problems we face would be for UK public sector pension funds to own the UK’s infrastructure. When such pension funds own private sector companies, we see that as private ownership. For example, when the Local Government Pension Scheme currently buys a a stake in a company, we don’t see hysterical headlines saying that the company has been nationalised. The pension funds have capital to invest, they are subject to statutory requirements to maximise investment returns and they invest in companies with the best private sector management. But given that very little of the privatised utilities are owned by UK public sector pension funds and, even more problematically, most of the UK public sector pensions are unfunded (i.e. have no money at all), how could this solution possibly work?

Well, if we assume that the UK Government is willing to intervene with all its financial and statutory firepower, here are three illustrative examples of how UK national infrastructure could be owned by UK public sector pension funds. (I am not arguing for these solutions – I am just arguing that we should have an argument!):

1. Renationalise energy and water and return their ownership to local authorities – There is only one funded public sector pension scheme in the UK (assuming that we see universities as in the private sector). That is the Local Government Pension Scheme. This has assets of some £150 billion. Unlike the North American public pension schemes, it only has 1% invested in infrastructure. The LGPS is in effect paid for by taxpayers. 20% of the council payroll is paid into the pension scheme. Given increases in life expectancy, the liabilities of the scheme increase 10% every decade. The LGPS currently operates 99 local funds, all with expensive advisors and overheads. A first step would be merge these into one consolidated fund. A second step would be sell-off 75% of its current assets, releasing £110 billion of cash. This would be the war chest for the third step, which would be to purchase the currently privatised utilities in water and energy. £110 billion should be sufficient to buy the water companies, National Grid, the energy generators and the power network companies. The remaining wealth of the LGPS is available for future investment in new infrastructure. The companies bought by the LGPS continue to be privately-owned – in the same way as other companies owned in part or full by public sector pension funds. The companies would still be regulated and Government would still underwrite contracts for major new infrastructure, as it does now. The regulator (and Government) would have a duty, as now, to ensure that the companies can make an acceptable return for their shareholder, equivalent to what the LGPS would have earned on its current investments. But the public would know that the single shareholder in energy and water is now the LGPS. It is in the public’s interest for this shareholder to make a strong return. A strong return will reduce the pension deficit for local councils, which in turn will reduce the contribution required from the council tax. In effect, this makes all council tax payers shareholders in the nation’s energy and water companies. For those with a sense of history, this returns energy and water to their municipal origins.

2. Fund the Armed Forces Pension with public housing and land – The Armed Forces Pension is currently unfunded, but has future liabilities of £125 billion. Here’s a way to fund the scheme. The ownership of all council housing stock could be transferred to this new Fund, including outstanding debt. All of the 1.8m homes would be sold on the open market as and when tenancies reach a natural end. At an average market value of £120,000, this would generate some £220 billion over a 15-20 year period. Of this some £30 billion would be used to pay off the outstanding debt on the houses. Of the balance of £190 billion, £90bn would be used to replace the sold-off properties by building 1.8m brand new social homes, providing the £50,000 capital subsidy that each one needs. It could then own these new homes, but have them managed by housing associations. This would leave a net cash surplus of £100 billion to go into the new Armed Forces Pension Fund. In addition to council housing, Government could transfer to new Fund the £40 billion of repayable grant that sits on the balance sheets of housing associations. It could ask for interest on the grants at, say, 5% per annum, generating a new income stream of £2 billion per year, or the repayment of the £40bn grants, funded by the sale of existing properties when tenancies naturally churn. In addition, it could transfer all surplus military land, adding many more billions of development land. Suddenly, we would have a new force in the land – the Armed Forces Pension Fund, with up to £140 billion of financial assets, land worth billions and over £250 billion of housing assets (i.e, the open market value of the 1.8m new social homes it built and owns) , focused exclusively on meeting the country’s housing needs. By rebuilding the council homes it sold off, it would add 1.8m new homes to the country’s housing stock, doubling the number of homes built during the period. After this, it’s mission would be build private homes. It would have a statutory duty to maximise returns on its assets from housing development. Ist would be obliged to put to work its massive financial muscle and the MOD’s surplus estate to transform the country’s housing supply. The Fund’s assets and revenue, along with its long term focus, would give it the financial strength to build homes ahead of demand and to develop at scale and over decades, e.g. creating new garden cities and suburbs.

3. Fund the NHS Pension with transport assets – The Government could create a funded scheme for the NHS, focused on transport. It could establish this fund by gifting two major assets overnight. Firstly, it could transfer Network Rail, with its assets of some £50 billion and annual profits of £2-3 billion. Given there are no private shareholders, no compensation would be due. This ownership could extend to other major new rail projects, such as High Speed Rail. Given the massive scale of investment in the UK’s railways over the next few decades (even before High Speed Two, capital spending will be the highest since the Victorian era) this asset base will rapidly expand, as will the profits. Secondly, Government could transfer ownership of the Highways Agency and the national road network into this NHS Pension Fund. This network has an asset value of over £100 billion. The Government could give the NHS Pension Fund the £2-3 billion per annum share of the current Vehicle Excise Duty (VED) which goes to the Highways Agency. However, given that this tax base will decline (given carbon efficient cars), the NHS Pension Fund could be asked to introduce tolling onto our national roads, as a replacement for VED. This would replicate European charging – so only those who use the national roads pay. On this basis, the NHS Pension Fund would be able to raise funds to improve the UK’s road system, where investment has been only half of that of our European competitors in recent decades. A regulator for both road and rail would allow the NHS Pension Fund to make a normal commercial return from its ownership of roads and rail. If it’s returns were better than predicted by the regulator, this would reduce the pension contributions needed from the NHS and, hence, from taxpayers. These two assets together would make a big dent in the £300 billion liabilities of the NHS Pension Fund. Given that NHS pensions are cash positive in this period (i.e. there is a large fairly young workforce paying in more now than is paid out), the NHS Pension Fund could put current surpluses to good use to create future assets.

Similar solutions can be found across the Government’s balance sheet. For example, maybe the ownership of school buildings should be transferred to the Teachers Pension Fund. Gradually a rent could be introduced payable by schools as tenants to the Teachers Pension Fund, creating a revenue stream. The Pension Fund could be the source of capital investment for those wanting to open new schools, as well as a residuary body for school buildings which have outlived their usefulness. Or, maybe the (funded) Universities Superannuation Scheme should be obliged to buy a substantial tranche of Student Loans debt, sharing some of the risk in whether students are able to pay off their education debts by finding well paid careers.

The idea would be to have the benefits of capitalism, e.g. the obligation on the capitalists (the pension funds) to make a good financial return; the opportunity to use today’s private capital (i.e. people’s savings) to invest in assets which make our economy more prosperous in the future; keeping companies under private management and ownership. But also to ensure that the UK’s future infrastructure investment needs can be served from UK capital, including the dormant assets sitting on the UK Government balance sheet, and that we have big players who are obliged to invest in the UK. This mirrors the retrenchment of banks after the 2008 Crisis, where they now largely balance their assets and liabilities in their own country, rather than being spread all over the world.

What would this all achieve? Would the public feel better knowing that privatised companies are owned by the NHS, Armed Forces and Local Government Pension Schemes? Would the public recognise that that strong profits from these companies were keeping down taxes, which would otherwise have to rise to pay for pension deficits? What would it be like if the UK had 3 new financial giants stalking the land, with hundreds of billions to invest in new housing and infrastructure? Would the cost of capital fall, cutting the cost of investment? How could we still have competitive pressure – e.g. by having separate operating companies (e.g. regional railways, existing water companies, etc) with incentivised managers competing to achieve the highest customer service and operational efficiency, underpinned by a regulator which penalised under-performers and public sector funds obliged by law to achieve regulatory standards and strong financial returns? Could there be a fairness debate, which says today’s population should pay a bit more for their utilities today to generate profits paid into pension funds for their old age, rather than just leaving the bill to be picked up by future generations? There is a lot to think about and this piece is just a thought experiment to spark debate. But perhaps in a General Election year, the UK public deserves some fresh thinking about renationalisation. Who knows, they may even demand it.

Sorting out the public finances Part 2 – Every part of the UK to pay its own way

The only thing more depressing than looking at the hard economic facts about our lowest performing regions is listening to the debate about how to solve the problems. There are two strands to this current debate. Firstly, there is a repetitive list of non-radical solutions (e.g. building new R&D facilities) to be found in all the Local Enterprise Partnership plans submitted yesterday to the Government. My reaction to these sort of solutions is the same as when an acquaintance told me that she was rejecting the normal treatment for cancer (aggressive surgery, chemo, radium, etc) and opting for the much more pleasant route of homeopathy. I wished her well and understood her horror at the thought of radical treatment. But I knew the statistics were against her. Such is the depth of the challenges in our low performing areas that only radical treatment will work. Secondly, there is a near universal clamour now for more devolution of power and money to the local level in the low performing areas. But this usually means devolving decisions on how to spend public money and how much to borrow, assuming that the tab will stick be picked up by others. Credible devolution has to based on requiring local areas to balance their budget locally. The problem underlying these two issues (avoidance of radical treatment and disbelief that low performing areas could ever balance their budget) is the lack of political leadership at a local level: the ability to own and explain the scale of the problem, to act swiftly and fundamentally to find solutions and to get people on board with the changes necessary. Oncologists have learnt how to do this. How could we rapidly help political leaders to be able to bring the right medicine to their areas? And, given it’s hard, do we really need to confront the problem?

At the height of its recent crisis, Greece had a fiscal deficit of 15%. This drew worldwide attention, threatened the European banking system and required an international bail-out in exchange for a brutal turnaround plan, supervised by the Troika of the IMF, the EU and the ECB. The UK’s deficit was also unsustainable, standing at 10% in 2011. However, this national average hid the fact that half of the UK had deficits which were as bad as Greece, or much worse. This meant that almost 3 times as many people in the UK lived in regions with worse deficits than Greece, with its population of just 11m. Three parts of the UK stand out, with 2011 deficits which were more than twice the level reached by Greece – Northern Ireland (39%), Wales (36%) or the North East (32%). But the rest of the North of England (NW and Yorkshire & Humberside) and the Midlands had higher deficits than Greece. By contrast, in 2011 London and the South East were in surplus, whilst Scotland, the East of England and the South West had UK average levels of deficit, albeit it at c10% they were high. A recent study suggests that Greater Manchester, one of the more successful cities in the North, is currently running an annual deficit of £5 billion per year, which would require local people to earn 30% more in wages and profits to break even. Whilst the deficit areas of the UK are now (rightly) asking for more devolution of power and financial responsibility, it is important to note that, ironically, it is only our highly centralised system of government which has stopped these areas going completely bust. Not only would 20-40% deficits have been unacceptable to lenders being asked to fill the gap in regional finances, but if these areas had had to do their own borrowing then the weakest of the areas (running a 20% deficit over 30 years) would find that the majority of their spending today would be on debt interest payments, leaving only 3rd world levels of funding for pensions, health, education, etc. Of course, the lenders would have called time on this situation many years ago, causing a collapse of Argentinian proportions.

There is a lot to do to solve the long-term problems we face. But I propose 3 things which I think are big enough to be game changing:

1. Legislate so that public spending and tax balance in each and every part of the UK within 15 years

We can’t just take regional fiscal deficits for granted – and we don’t need to. Given that the UK needs to balance its budget, it’s no way to run a country if half of it can’t pay its way – particularly if the situation is going to get worse. The main lesson of the Great Financial Crisis for the West was that someone always has to pay. At the moment the deficit areas of the UK have relied on income transfers from London and the South East. But clearly this isn’t enough, which is why the country still has one of the highest deficits in the developed world, in spite of tough cuts over the last few years. Even when the national deficit is eliminated in 2018, this will disguise the ongoing structural deficits in half of the country, some of which will remain in excess of Greece’s deepest crisis. Even if the south of the country could afford to subsidise the rest (which I doubt), it is a very risky strategy for the UK as there are many competitive threats to London and the South East. We all know what happened when we relied on the City of London to pay for the rest of the country’s public spending – it was great whilst it lasted and disastrous when global events turned against us.

So, my proposal is that every nation (Scotland, Wales, NI) and every region of England is required by law to balance its spending and revenue by 2030 and make prescribed progress every 3 years to this 15 year goal. This would include all spending – pensions, health, education, benefits, policing, local authority services, etc – with the exception of capital spending on economic infrastructure. The latter is lumpy (e.g. a high speed railway happens once in a generation) and a genuine investment in economic growth. The taxes (and other revenues) collected in the area would need to cover spending – eliminating any structural deficit. Rules would be set to allow for the economic cycle – small surpluses in good times, small deficits in bad times. Tough rules would also be set to force local areas to sort out their balance sheet – e.g. selling off their social homes given that market rents and social rents are similar in these areas, releasing tens of billions of pounds to reinvest in economic infrastructure like rapid transport links between Northern cities. The nation or region would be given a high level of fiscal devolution, as the only way to balance the budget is to increase taxes or reduce spending. This would be a dramatic step for the UK, which has about the lowest level of sub-national fiscal devolution of any developed country. But it’s necessary. And it’s also obviously possible, as we are going in that direction with Scotland. Irrespective of the independence vote, Scotland already controls the majority of public spending and is about to take on responsibility for the levels of income tax collected in Scotland, taking on the risk and reward of them rising or falling.

My law gives power and accountability to the national governments, but insist that the UK Secretary of State for each nation was equally obliged to achieve the fiscal balance. The national governments and the relevant SoS would be obliged to produce a 15 year plan, with 3 year milestones towards balancing the budget. This would need to be validated by the Office for Budget Responsibility (OBR). There would need to be a rolling 3 year budget, which is on track to hit the 3 year milestone. This would be validated by the relevant National Auditor. It is not so immediately easy to choose who should be in charge in the English regions. Ideally, there would, as in London, be strong Mayors leading the metropolitan city regions (Greater Manchester, South Yorkshire, etc). But there aren’t. There is lots of current debate about this. Well, maybe, we just need to bite the bullet and do it. One answer would be say that unless a city region chooses to have a Metro Mayor, then a Government Minister would be put in charge of balancing the budget in each city region. He or she would be democratically accountable, but clearly it’s less attractive than a directly elected local politician.

The UK Government would still play a vital role in tax and spend. Firstly, it would still have key national responsibilities, like defence and national security, national transport, economic regulation, etc. Secondly, it would put the financial might of the whole of the UK behind each nation and region’s fiscal position, issuing national bonds, managing the cash flow of spending and revenues, dealing with shocks to the system. Thirdly, it would do much of the administration for nations and regions, such as collecting taxes, paying pensions, etc – but they would pick up the tab in their locally balanced budget.

This fiscal devolution is tough medicine. But it also treats people like grown ups. We have seen how local government and the police have responded in the last few years to having to make large cuts in spend, in exchange for more freedom to make the best local fist of it. At the heart of this devolution is local political leadership and its ability to engage local people in the difficult choices in making the books balance. Much of this is about who pays what tax (e.g. more freedom on council tax rates or National Insurance charges), what levels of entitlement can be afforded (e.g. whether benefit rates or public sector pay should be regional rather than national) and which types of public spending are the real local priorities. But of course, the big opportunity to change the deficit lies in improving the local economy. My other proposals focus on the best ways to do this.

2. Double the number of 25-34 year olds in the designated regions within 15 years

There is a demographic crisis in the deficit areas. Overall population levels are predicted to be either static or have modest growth. But this disguises the problem. On the one hand, the population is growing because people are living longer. And this is what drives public spending – on pensions, on health care, social care, etc. On the other hand, in many areas, the working population is declining. And this is what causes tax revenues to decline. This is the worst possible vicious circle for a future deficit, let alone the local economy. We can see this clearly by looking at the Old Age Support Ratio, i.e. the ratio of the working age population to the retired population. In Leeds, for example, this is currently 3.2 (i.e. 3 times as many working age people as retired). But in 20 years time it will fall to 1.7. Even putting up the retirement age to 70 is not enough to maintain the current ratio. (It would need to be 72).

But why isn’t there a demographic crisis in the South? The answer is simple, if politically uncomfortable. More than a third of London’s residents were born overseas – compared to 1 in 20 in the North East. Indeed, there are now more foreign born people in London than there are residents of any description in the North East! London and the South East have about a quarter of the UK’s overall population but more than half of the foreign born residents. The pace of this divergence between the South and the rest of the UK has really accelerated in the last 15 years. A telling statistic is that until 2001, the North West had a bigger population than London. Now London has 1m more people. It has grown. The North West has been static (like the North East and Wales). 1m more foreign-born residents moved into London in this period. Merseyside, for example, attracted just 29,000 additional foreign born residents between 1995 and 2012. Its working age population will fall by up to 15% over the next 20 years.

It’s very hard to see how the deficit areas can turn themselves around without a major inward migration of working age people. The critical group to attract is the 25-34 year olds. These are the wealth creators, who have turned around many cities in the world – including London. Given the challenges facing the deficit areas, there is a need for a massive increase in the size of this group and it is urgent. Therefore, I propose a target of doubling the size of the age group in the deficit areas within 15 years. That would add about 10-15% to the total population in each of the areas. This is the sort of growth that London and the South East have experienced in the last 15 years. Starting in 2015, this could be a “15 in 15 from 15″ strategy.

Where will all these people come from? Well, it’s too late to start breeding, as today’s new born won’t join the labour force in the next 15 years. So it means attracting young people from elsewhere. Partly this can be from other parts of the UK, especially the South. We could adopt a number of targeted policies to achieve this. For example, many of the deficit areas attract large numbers of students, but then struggle to retain them once they graduate. Perhaps we should offer a 5 or 10 year holiday on repaying student loans for those stay in the area to which they moved to study? Perhaps we could offer government backed mortgages for first time buyers who relocate into the area, where payments start low and rise in line with inflation over 25 years (rather than the current opposite which undermines home ownership aspirations for all)? But a large part of the increase will probably have to come from immigration. Let’s save a full argument about immigration for another post. Suffice to say here that I think we need high levels of immigration for 2 reasons – our ageing population and our need to attract the world’s best to the UK – but it needs to be the right immigration, so we need much more control of who comes to the country. In this spirit, one answer to the problems of the North would be offer location-specific visas, entitling people to live and work in a named city or region. This isn’t as impractical as it may first sound. We already do this for the largest group of visa holders – students. A visa is tied to a particular course at at a particular university – if the student fails to attend or leaves the university, the visa is revoked. So it’s entirely feasible to do this for designated areas of the country, perhaps attaching a visa to a job / running a business and payment of Council Tax in the area. This doesn’t just mean offering visas to non EU countries (e.g. to the young Australians, Canadians and South Americans) and seeing what happens. It should also mean investing very heavily in head-hunting the best in the world. Silicon Valley is what it is in large part due to the active recruitment of India’s best software engineers. Why don’t our deficit areas employ headhunters and offer incentives to the world’s smartest 25-28 year olds – the products of the world’s best universities in design, business, applied science, etc and those trained by the world’s best corporations. They aren’t hard to find, but they need a hard sell … and visas.

There is clearly also a hard sell needed within the deficit areas to convince people, who feel that there aren’t enough jobs or public services for those who already live there and believe, wrongly but passionately, that more people moving into the area will just make everyone worse off. It’s not easy to explain the complexity of labour market economics or fiscal sustainability. Let’s try a one word explanation – “Suarez”. The immigration of a Uruguyan into Liverpool has transformed the fortunes of the football club and the morale of at least half of the city. It has also lifted the global status of the city. (The other half of the city has been cheered by the genius of their new Spanish manager.) As Liverpool are poised to win the Premier League, I haven’t heard many local voices calling for South Americans to be sent home so a local lad can have the job! We need the same attitude to the economy as we have to football – busting a gut to get the world’s best people to come, in large numbers, to our deficit areas.

3. Create a bigger private sector in the deficit areas

In half of the country, less than half of working age adults work in the private sector economy. In South East, the richest region, two-thirds of working age adults work in the private economy. In South Wales, it less than a third. Throughout our northern cities (and the largest cities in the Midlands), 6 out of 10 working age adults are not working in the private sector. This includes major business centres like Manchester and Birmingham.

How can we possibly balance our national budget if this continues? One-third of the population is retired, the school leaving age has been raised to 18 … so how can we pay our way if less than half of the working age adults are employed in the private economy? The first problem is simply that in the deficit areas not enough people work, irrespective of who they work for. In the most prosperous parts of the country 9 out of 10 working age adults are in employment. In some of biggest Northern and Midlands cities, this falls less than 6 out of 10. The second problem is that not enough people work in the private sector. The average UK ratio of private to public jobs is 3:1, i.e. three-quarters of jobs are in the private sector. In the most successful areas of the UK, there are 6 private sector jobs for each 1 in the public sector. In the deficit areas many areas struggle to achieve 2:1. In Cardiff and Swansea, for example, there are only 3 private sector jobs for every 2 in the public sector. The problem is not too many public sector jobs. It’s a shortage of private sector jobs. Often the areas with a high proportion of jobs in the public sector have the lowest levels of people working in any sector. One rapid answer to this problem is to move the public sector into the private sector. This is not ideology, but pragmatism. Local public bodies rarely bring any income into the area – they just meet local need. But turn them into real businesses and they will be incentivised to draw business into their area (e.g. taking over the back office functions of public bodies in the high cost South East; attracting overseas private patients into local hospitals; diversifying from public revenues to win private sector business like the Teachers Pension Agency in Darlington has done by winning work from the life insurance industry in London; etc). One would expect the deficit areas (with lower costs and slack labour markets) to have attracted a lot of outsourced activity from higher cost, tighter labour markets. However, the opposite is true. London and the South East earn twice as much income (wages and profits) from outsourced businesses as the North West, Wales and Northern Ireland. Not only does privatising public services offer the chance to bring in external revenue, it also gives a unique opportunity for a dramatic shift in culture in the deficit areas from a public sector focus to a new entrepreneurial era. But this won’t come by simply asking large, Southern based corporations to take over public bodies. My proposal is that we mandate, within 3 years, the transfer of public services (apart from the police) to new employee-owned businesses. The models for this in the private sector are outstanding – world class organisations like John Lewis and Arup. Having our teachers, doctors, nurses, social workers, highways engineers, etc owning their own company and having to compete for contracts every few years would mark a historical change in the economy and culture of the deficit areas.

Conclusion

This is radical treatment. And probably no more popular with many people than being told they need radical medical treatment! But balancing the books, importing a workforce that can pay for the ageing society and turning millions of public sector staff into business owners are the sort of measures which could change the survival rates of our struggling areas and, just as importantly, ensure that the whole country can pay its own way. I am not naive about how hard this is for any politicians. And before my radicalism is dismissed as Southern arrogance, I would note that I spent the first 25 years of my life in the North West. When I was little my dad and grandad both worked on the Liverpool docks, then as they were closing we moved for a new job in a factory in the false dawn that was Skelmersdale New Town, where within 15 years most of the new factories closed down too. So I know this is a tough assignment, but I also feel passionately that it must be grasped.