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.

How to create 2m new private sector jobs in the lowest performing regions – in just 3 years

 

There is no end of debate about how could the rest of the UK’s economy perform as well as London and the South East? Here’s a simple, but bold idea to transform the under-performing areas of our country within 5 years, changing both the culture and economic structure of those areas. The key thing with this idea is that, unlike most economic development, the levers of change really do sit with local and central government – but whether they are prepared to pull those levers is the issue. 

In half of the country, less than half of working age adults (18-64) have jobs in the private sector economy. In the most successful areas (e.g. the South East counties), the figure is two-thirds. In the least successful areas, it is little more than a third (e.g. in South Wales) .   Throughout our major Northern England cities (and our biggest Midlands cities) only 4 out of 10 working age people are employed in the private economy. This includes large cities with major central business districts and big private employers like Birmingham and Manchester. It is slightly hard to believe that in one of the world’s most established market economies, the majority of working age adults in large swathes of the country are not employed in the private sector. 

Does this matter? Well, low levels of employment in the private economy appear almost always to mean a weak local economy. For these areas with low levels of private employment and a weak economy, there are typically four problems:

Firstly, not enough people have jobs in any sector – private, public or voluntary. More people working means richer regions and richer households. The most prosperous economies in Europe have high rates of economic activity in their population – much of Scandinavia’s success, for example, comes from the very high levels of female employment. This is true within in the UK. Some areas of the South East have nearly 9 out of 10 working age adults in employment; some of our biggest cities in the North and Midlands have less than 6 in 10 people in employment. The gap between the two is a mixture of fewer people seeking employment and higher rates of unemployment. 

Secondly, of those who work, not enough people work in the private sector. This matters because the most successful areas have far more of their residents in private than public sector jobs. The average ratio of private sector to public sector employment is 3:1, i.e. 3 times as many people are employed in the private rather the public sector. In the most successful parts of the country, this rises to 6:1. In Cardiff and Swansea this falls to 1:1.5, i.e. there are only 50% more people employed in the private than the public sector. There are  many places (e.g. Glasgow, York, Newcastle, Sheffield) which only just manage 2:1 and the biggest northern cities (e.g. Leeds and Liverpool) are well below average. This is not an ideological concern. Private sector businesses can grow the local economy – they are able to compete regionally, nationally and internationally to bring new revenue into the local area, generating extra wages and profits for the local economy. In most cases, the public sector can’t do this. Local public bodies mostly only provide for local needs and are constrained by the size of that local market. They mostly don’t sell their services to other areas or pull external revenues into their local area. Local economies get rich by specialisation and exchange – doing what they are best at and trading those services with other areas. People working in the public sector largely can’t do this. They can be world class at what they do, but are mostly unable to grow their market share. Where public services have moved to the private sector, they have a track record of growing the local economy. A good example is the Teachers’ Pension Agency in Darlington, which since it was privatised in 1996 has diversified into processing services for the life insurance industry, importing work from London and elsewhere into Darlington. Similarly, some of London’s best health providers attract custom from all over the world. It’s worth noting that the most successful areas of the country have the highest proportion of outsourced services. Outsourced services are 10% of the economy. (Two-thirds of outsourcing is between private sector companies. Contrary to what many on the left assert, outsourcing is a pragmatic, not political, way for organisations to focus on their core activities and only one-third is from the public sector). The economy in London and the South East has twice as much of its income (wages and profits) from outsourcing companies as the most deprived parts of the North West, Wales and Northern Ireland. Given the lower employment costs and higher unemployment rates in these more deprived areas, one would expect the opposite. 

Thirdly, this is not a simple story of the public sector being too big in the less successful areas. Some of the places with the lowest private sector employment rates also have the lowest public sector rates as well. For example, Birmingham, Middlesborough and the Welsh Valleys all have below average percentages of the working age population employed in the public sector. The problem is not that there are too many public sector jobs, but that there aren’t enough people in private sector jobs. For example, Copeland in Cumbria has the highest proportion of its local jobs in the public sector (at 52%) but only 14% of the working age population are employed in the public sector. The problem in too many areas is that not enough people are in work – for anyone. The areas with relatively few people employed in the private sector are the areas which struggle to grow new enterprises. The birthrate for new businesses in the South East is double that in the North East, whilst the London business birthrate is three times higher than the North East or Wales. London’s birthrate is typically more than double the rate across the whole of the North and Midlands. Given that it is young businesses which generate jobs and growth, this matters hugely. 

Fourthly, public sector employment currently looks under threat in many of the areas with limited private sector jobs. As one city leader said to me recently, the public sector looks like the new declining industry. After the loss of jobs in manufacturing, shipbuilding, coal mining, textiles, etc, public sector jobs face two big threats. The first threat is fiscal. Cuts in spending have necessarily hit the areas with the highest public spending. Given that spending is highest in areas of deprivation, the cuts have been felt hard in areas with low levels of private sector employment. It’s hard to see this getting easier for some time to come. The second threat is technology change. As government goes digital, there will be much less need for large administrative processing centres. This is a particular threat to areas (e.g. Liverpool, South Wales, Newcastle, Sheffield) where previous governments relocated civil service jobs to mitigate the effect of other declining industries. 

Most of the areas with these problems have plans to tackle them. Their economic plans commonly focus on three big actions: to attract private sector employers to the area; to develop a more entrepreneurial culture and increase the formation of new businesses; to skill up the local workforce to improve its access to employment and to attract employers. But I think that most of these plans are missing a big opportunity to transform these local economies – and an opportunity which is, unusually for economic development, entirely within the control of local and national governments. A simple way to rapidly increase the level of private sector employment  in these areas is to transfer public sector jobs to the private sector. Done in the right way, this could transform the economic culture and employment opportunities of many of our struggling cities, towns and counties. But it must be done in the right way. My proposal is this:

1) By 2017, all areas of England and Wales with below average rates of employment in the private sector would be legally required to reduce their public sector employment to meet a set of very demanding quotas (outlined below). By definition, this would impact on half of the country. It would mostly affect the North, Midlands and Wales. But there would be a number of other areas affected, e.g. some East London boroughs. The quotas would cover the whole public sector in the selected areas – central government, local government, education and health. Up to 2 million jobs could transfer to the private sector. Why quotas? Well, they have worked well when used. Three examples from the early 1990s are instructive. For example, 20 years ago legal supply quotas were introduced in community care – 80% of all new spend had to go to the “independent sector” (either private or voluntary sector). From almost nothing, an independent sector was created which has since grown to see hundreds of thousands of staff employed in businesses and charities (big and small) delivering social and community services. Without this legal requirement, it is almost certain that all of these jobs would be in the public sector. Similarly, quotas were introduced for public service broadcasting. The BBC was required to buy a quarter of its output from an independent sector and the new Channel 4 was designed to buy 100% of its programmes from the new “indies”. Since then a vibrant indie sector has grown up and the BBC has opened up a further 25% of its output to competition. The third example is FE colleges which were all transferred into private companies in the 1990s. Since then, there has been an active programme of mergers and acquisitions within the sector. One example of the entrepreneurial spirit is that 2 Northern FE colleges (Newcastle and Manchester) have between them won the majority of contracts for prison education across the whole country. By contrast, when legal requirements to privatise are withdrawn the public sector has tended to re-grow its own employment, e.g. after Compulsory Competitive Tendering was ended, a range of local government services were brought back in-house. One example is that just over half of refuse collection is now back in-house. Personally, I think quotas for the whole of the country would be a good thing. But this proposal deliberately applies just to the areas with limited private sector employment – it is intended to give those areas a headstart on the rest of the country, creating businesses which can then sell themselves to the rest of the country, given that the non-quota areas have less dependency on / expertise in the public sector and are likely to buy-in services from the new businesses.

2) My way to reduce public sector employment (and increase private sector jobs) would be to transfer existing staff and services to employee-owned companies. This is an essential part of transforming the economic culture of the areas affected. There are many benefits of transferring functions to large existing corporations. But that misses the point. We want traditional public service staff (and areas) to become entrepreneurs, shareholders and commercial successes. That is what will empower them to take control of their own destiny and to win market share to benefit their local area. Employee-owned companies are not a wacky, hippy idea. Some of our most successful companies are employee-owned – John Lewis in retail and Arup in construction. Much of the resistance to privatisation has come from staff who do not want to be taken over by an existing company or public bodies who do not want a small number of existing managers to make themselves rich through “fat cat” wages or profits. Employee ownership addresses both issues. Indeed, it has a growing track record in the public sector, with some 30,000 staff having moved into employee owned companies in recent years. There can be many forms of employee ownership, including involving a minority stake for existing private companies and financial backers. Should staff not be willing to take ownership of their organisation / service, then the fall-back could be a traditional outsourcing. 

3) There could be different quotas for different types of service. For services with a well developed market already, the quota would be 90% in each service. This would include services which are heavily outsourced (in the economy as a whole at least) by the private and public sector (e.g. IT, construction, property management, call centres, back office functions, etc). The 90% also include services where there is a strong mixed economy in public services (e.g. social care, special education, prisons, hospital labs, social housing, highways management, early years, etc). I think there is a strong case to set a similar quota for most other local government services in these areas (e.g. planning services) and central government administration (e.g. benefits administration, court services and job centres). By contrast, I would exempt the uniformed part of the military, police and fire services. In all these cases, their business support functions ought to be subject to the 90% quota. That leaves two major services which will be seen to be especially sensitive – health and schools. But how sensitive are they really, if we are talking about employee-ownership? The idea of mixing the private sector and the NHS gets people very agitated. But actually the great majority of NHS organisations are profit-making businesses, most of them owned by their employees already. Really? Yes, really. Firstly, there are the thousands of dentists, opticians and pharmacists who provide NHS funded services – from their profit making businesses. Some are huge (e.g. Boots the Chemist) and most are small enterprises. Secondly, there are the GP practices. In most cases, GPs are not employees of the NHS, or any other part of government. They are the owners of small businesses and instead of a salary their personal income comes exclusively from the profit they make from running their own surgery – the profit being the difference between the prices the NHS pays their business and the costs they incur (premises, staffing, etc) in delivering the required services. GPs are regularly named by the public as the most trusted and valued public servants, irrespective of their long-term determination not to be public sector staff and to stay as profit-making business men and women. So if they can run successful NHS businesses, what is to stop medics in hospitals doing the same? Most hospitals have become more like businesses in recent years – as independent foundation trusts. But the ownership of these trusts is not really clear. Making them employee-owned businesses would seem like a logical next step. Within this move, many medics may wish, and could be supported, to spin-out smaller businesses, typically in their own specialism. Similarly, the transfer of state-funded schools from the public to the independent sector is well underway. We now have thousands of academies and a growing number of free schools. We have now had 25 years of giving schools autonomy. The model works – dramatically well. We could now push this to a conclusion in the quota areas – completing the transfer of state schools to academy or free school status and giving employees ownership of their schools. In both health and education, there is already a system of minimum standards, inspection, public data on performance, money following customer choice and a system for dealing with failed organisations. This could easily apply to the newly employee-owned hospitals and schools – if they fail to meet minimum standards and / or attract enough customers to be viable, the regulators could (as now) transfer ownership of the assets to another organisation. Given all these points on education and health, there is a strong argument to apply high quotas for transfer to the private sector of hospitals and schools in the selected areas. 

4) Where the new businesses get contracts, the initial contracts would only be given for 3 years. (In other cases, such as schools, money would follow customer choice as it does now). The initial contracts would give them time to sort themselves into shape, on their own, or through mergers, acquisitions or divestments. At the end of the 3 years, customers for their services (be they individual consumers or public procurers) would have full discretion about the sort of services and providers they want in the future. At this point,   the new businesses would have marketed themselves to other areas, both locally and nationally, which, along with the entry of new entrants to the market, would create healthy competition. The ex public sector businesses would be free to sell their services to the private sector, as they wished. 

The key to these changes is:  achieving them fast (to focus on action, not debate); making them happen on a mass scale (so that they change the economy, not just create individual case studies); creating big new markets (to inspire entrepreneurial endeavour amongst former public servants who can see a way to grow their market share); mandating action (to align public sector reform with the economic and fiscal urgency facing these areas of the country). If national politicians are unwilling to impose quotas, there is nothing to stop one or more of the new city regions applying the quotas to themselves. But local action isn’t as useful as national. Turning up to 2m public sector staff into shareholders in their own businesses, competing for demand and innovating to be the best, is a bold ambition. But I think the time is right – for both local economies and public services. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Would it be better if our top talent emigrated … for a while, at least?

 

If (or as I fear, when) England fail to make the final stages of the World Cup in Rio, the post-mortem is predictable:  “We need fewer foreign players in the Premier League. We need quotas so that the majority of the players are English. Something must be done, and done immediately.”. Without being defeatist, it is worth heading off this knee-jerk response before the plane leaves for Brazil. Partly because it would be disastrous for one of the UK’s greatest success stories – the modern Premier League. But more importantly because this debate illuminates some important, but little talked about aspects of migration policy. 

Let’s look at the football situation. It’s clearly true that English players are a minority in the Premier League. They played only 32% of the total minutes played last year. 68% of players are not English. The foreigners come from all over the world. The largest contingent is the French and the Spanish, but they only have 10% each. The UK is not unique. If we look at the European nations most likely to make the World Cup final, then their percentage of overseas players has been growing. In spite of being the biggest country in Europe, only 50% of the minutes played in Germany’s top league were played by Germans. The equivalent figure is 59% in Spain. The high performing European nations and leagues are big importers of global talent. (If, however, we look at countries that didn’t make the world cup, the story is the opposite. Close to home, we can see that in Scotland 85% of the minutes played were from Brits.) Clearly it wasn’t always like this. In 1992, there were just 11 foreign players in the Premier League. Today there are more than 11 Brazilians playing in the same league, and even more Belgians. The other way to tell this story is to look at the various national teams. In 2013, 9 of the Spanish squad played abroad, 23 of the Uruguyans, 11 of the Dutch, 16 of the Portuguese and the Brazilian and 20 of the Belgians. By contrast, the English squad had 1 who played outside England – Fraser Forster and he played in, ermm, Scotland! And it is this last point which speaks volumes about  England’s failure to participate in the global economy of football. Across all the European leagues, I can think of only 3 English players earning their living by playing in Europe! It is incredible that of all the thousands of young men who crave a career in professional football and who bemoan the lack of space in the Premier League for English players, only 3 of them have gone abroad!

The wider lessons of the Premier League for our migration debate are:

(1) On the immigration front, when we attract the best people in the world to come to the UK, they push up wages, they drive exports, they create global brands and they attract investment. They bring money into the country, as overseas spending follows them around. Much of the Premier League’s value lies in its ability to pull in overseas payments for TV rights, replica kit, etc. Nearly 1m football tourists visit the UK, spending more than £700m a year. The League and its clubs pay over £1bn in taxes and the overseas players spend part of their earnings in the UK. This impact is replicated in other key industries where countries compete to attract a footloose global elite of professionals. The desire and need for the world’s elites to cluster together means that virtuous (or vicious) circles are created as locations rise (or fall) as global magnets for talent. We can readily think of the UK’s success in the glamourous worlds of science, advertising, architecture,fashion design, academia, investment funds, film and theatre, Formula 1 engineers, top surgeons, pop music, TV formats, etc. But is is also true of the less glamourous elite pools which are vital to our comparative advantage as a nation – actuaries,  data scientists, accountants, agronomists, car part designers, aerospace engineers, etc. 

(2)But this is only half the story. There is a big difference between having a Premier League at home through importing talent and becoming World Cup Champions by a having a big enough national talent pool which earns its living at home and abroad. This is true for the other global elite talent pools where, to use a footballing term, UK talent needs to play away as well as at home. If we want the best talent pools in the world, then we need to start worrying about getting the right emigration as well as immigration. This sounds counter-intuitive – why would we encourage our best people to leave the country? Well, much of our emigration is short-term – to count as emigration, people need to leave for 12 months or more. But the majority come back after working or studying abroad for a number of years. 90% of emigration is of working age adults. In 2011, for example,150,000 British citizens emigrated but 100,000 also returned, leaving a net migration of 50,000. Interestingly, British emigration increases in the good economic times – it is something people do when they feel strong, not weak. So when we say more emigration of our elite people is a good thing – it’s about them getting experience and opportunities they can’t get in the UK, before coming back again as even greater talents and wealthier than when they left. And if they don’t come back, we should see them as a ready source of global contacts to assist our international trade and liaison.

So if emigration of our best people can be a good thing, do we have enough of it? Compared to other countries we actually have lots of emigration. About 5m British born people live abroad. Of the high income OECD countries, the UK has the largest number of citizens living abroad, far more than those born in Germany or the US, for example. By proportion, Portugal, Greece and Ireland have higher percentages living abroad, but from smaller populations. If we look at countries with large numbers of immigrants to the UK, it is interesting to note that Poland and the UK have the same proportion of their population living abroad, whilst the number of Pakistanis living abroad is about the same as the number of British. But it is salutary to look at where the Brits go. The biggest destination is Australia – approaching half of all emigration in 2010, with the US coming second. Indeed, two-thirds of British born citizens living abroad are in the Anglophone countries. (Unfortunately, these countries are not very good at football, or we’d be fine for the World Cup!). About 15% of British born citizens are in Spain, France or Germany. Beyond this, the numbers per country are small. Why this matters is that the numbers are tiny in the emerging economies, which have the highest growth potential. The BRICS (Brazil, Russia, India, China) countries have about 80,000 British born people living there, less than 2% of those Brits living abroad. There are 10 times as many Brits living in New Zealand as in either India or China. The same is true of the MINT countries (Mexico, Indonesia, Nigeria, Thailand) with some 70,000 or so Brits, over half of whom are in Thailand. So whilst we have lots of emigrants, we don’t necessarily have the right sort of emigrants in the right places.

If we accept the counter-intuitive argument that we should encourage our best people to leave the country for a while, what might this mean:

(1) Should we be encouraging more of our students to study overseas? If we want our talent pool to be the best in the world, then shouldn’t we make sure that our best students go to the best universities in the world? Other countries do just that (e.g. a quarter of international students at US universities are from China). If we look at the all important STEM subjects (Science, Technology, Engineering, Maths), then in almost every subject the UK has 2 of the top 20 universities in the world. On the one hand, this is a good achievement. On the other hand, in most subjects the US has between 14 and 18 of the top 20 universities. So why wouldn’t we want our best students to go to those universities to be a part of the global elite? But in 2011, whilst the UK had a a Premier League performance in attracting overseas students here (13% market share, second only to the US on 23%) and 2m UK residents were registered students with UK universities, only 6,000 UK residents went abroad to study. If we see higher education as a global product for sale (as many other countries do), then why are so protectionist about keeping UK demand in the UK? In other markets, we see global competition as good for UK consumers and good competitive pressure on UK suppliers. So, maybe we should worry about being under-represented in the world’s best universities and push our best HE consumers to buy overseas?

(2) If we want to sell more services to the emerging economies, how do we get more Brits to emigrate there for a while? Selling services overseas is hard work. Unlike making a car in Sunderland and putting it on a ship, services often have to be delivered, at least in part, in the other country. They require cultural insight and adaptation. Sales rely on personal relationships and interaction with the overseas buyers. And, like football, they rely on having the best global talent. It also means that much of the revenue from sold services stays overseas, paying for local delivery. Many economists are dismissive about the potential for services to pay our way in the world. But we don’t have any choice. Unlike Australia, Russia or Canada, we don’t have masses of natural resources to export. Unlike Germany we don’t have enough manufacturing exports (yet, at least) to buy what we want from the rest of the world. But we are good at services. Just think (in terms of A-Z), of the services beginning with an A, where we are world class – architecture, advertising, accountancy, actuaries, agronomy, arts, academia, etc. The UK share of global exports of services is 6.4%. Not too bad? But our share has fallen by 20% since 2000. Meanwhile Germany has increased its share by 10%. And our share of trade more generally with the growing emerging economies is under pressure. For example, our share of India’s imports has halved in the last decade. There is a need to have plenty of Brits on the ground in our export markets. As outlined above, we lack these numbers in the emerging economies. And in our mature markets and popular destinations for our emigrants, the emerging countries are themselves are pushing us out of place. 60% of permanent resident visas in Australia are now granted to Chinese, who will soon replace the British as the biggest immigrant group. Indeed they already have in Sydney. Even more strikingly, the emerging economies are rapidly populating the next generation of emerging economies. In the last 10 years, more than 1m Chinese workers have moved into sub-Saharan Africa working for 2,000 Chinese companies. Do we need a concerted campaign to encourage British talent to spend time abroad? “Go East Young Man”? Should we offer grants, tax breaks, remission from student loans, etc to individual British talent who go on time limited economic visas to our target countries? Should we offer similar assistance to UK employers who are exporting British talent into our target countries?

(3) If we want to tackle our skill gaps, rather than relying on short-term imports should be relying on long-term exports? The Home Office publishes a formal list of very specific shortage occupations, where it will allow immigration from non EU countries. Looking at the 2013 statement, it is clear that the shortages largely result from sporadic historic demand for those skills in the UK domestic market. It is equally clear that that there has been and continues to be demand for those skills overseas. If there had been more people willing to work overseas as well as in the UK, then we could have had a much larger British talent pool in these shortage areas. For example, we don’t have enough railway signals engineers. We get into a circular argument about spending more on railway engineering, where we keep spend low because skills supply is low. But if we increased total demand for these skills by more people working overseas for periods of time, then the supply pool could be increased.The 2013 Home Office statement lists similar examples – geologists and drilling engineers for oil and gas; tunnelling skills; electricity transmission engineers. UK infrastructure spend will increase over the next 5-15 years. But it will dwarfed by massive infrastructure investment in Asia and Africa. Total demand in the world will grow sharply. But will our supply of skilled people increase so that we can go out and fight for our share of this overseas investment, as well as deliver what we need here? This means signalling this demand to our workforce, so that they get themselves skilled and gear themselves up for overseas work. It also means unblocking constraints on numbers getting trained (e.g. university places, professional regulation, etc) and preparing our talent for the world, rather than UK, market. Clearly, the point of exporting talent is to have more of it, not less, so more emigration of our best people only makes sense if we make sure that the total number of British people participating in global elites increases.

(4) And finally, of course, it means more British footballers getting in their Bentley (for the established ones) or onto Ryanair (for the less established ones) and playing overseas. That would give us a bigger pool of talent playing at the highest level across Europe.

The current migration debate is very focused on net immigration. But we also need to look at the other half of the equation – the emigration. In the same way that we measure and debate the numbers coming in, do we need to measure the participation rate of British citizens (vs our competitors) in the elite opportunities open to British talent around the world – whether those opportunities are in medicine, constructing infrastructure, studying at the top universities, data science, pop music or …. football? Let’s hope that in terms of the wider economy by 2018, we have got on top of immigration so that we have a Premier League in all chosen industries. But let’s also hope that we are winning the World Cup in those chosen industries because of the size of our talent pool, which has grown by enthusiastic, time limited emigration giving us access to overseas markets.

For a historic increase in the Minimum Wage, we need a Nixon in China moment….

In 1972, President Nixon went to China to meet Chairman Mao. As well as transforming the future of both nations, the visit also coined the phrase a “Nixon in China moment”. It was such a shock that a US President could visit the Evil Empire of Communism, that the Democratic Senate Leader said “Only a Republican, perhaps only Nixon, could have made this break and gotten away with it”. I believe that we need a dramatic, historic increase in the Minimum Wage in the UK  and I believe that this is the right time to do it. But I also believe that, to update a phrase,  “Only a Conservative, perhaps only a Cameron or an Osborne, could make this break and get away with it”. It is hard for the left to propose a dramatic uplift without being accused of being reckless, anti-business or just, well, socialist. So in the same way that a Conservative-led government has been trusted to cut defence and police spending (but knew that it was less trusted to make cuts in the NHS, so didn’t), the responsibility to do what is right on the Minimum Wage falls to the Conservatives. A lot of the current debate is about whether this year’s annual uplift should be a bit more generous than other years – could we stretch to 50p (8%)extra? But I think this is the wrong question. This should be a bigger, more historical moment. We should close the chapter on the 1998 Minimum Wage that we’ve had for the last 15 years, start a new chapter and reset the minimum at a very different level for the next 15 years. 

Before I nail my colours to the mast on the right level for the Minimum Wage, here are some of the reasons why I believe it can be radically increased without backfiring:

1) Low wage earners are, overwhelmingly, providing services for domestic consumers within the UK economy. They work in shops, cafes and hotels. They cut our hair, they clean our houses, they look after our kids and they care for our elderly.  They are not  in manufacturing, competing on the price of their labour with other countries. What they do has to be done in this country. Nor is it tradable with other countries. If the Minimum Wage increases, it impacts equally on all of an employer’s competitors, so there is no disadvantage. 

2) Raising the lowest wages does not mean that employers simply have to, or will, just cut jobs or working hours to keep the wage bill constant. The evidence is clear that employers find a variety of solutions.  Firstly, they restrain pay growth for their better paid staff. Secondly, they increase prices to consumers. Thirdly, they improve productivity and get more out of each hour that they are paying for. And then they squeeze their profits. Through productivity gains, they either earn more revenue or cut the amount of labour they need. 

3) Increasing low pay has a limited impact on the overall costs of most businesses. In some sectors, very few earn less than the living wage, e.g only 6% in manufacturing. Even in hotels and catering, which is one of the biggests sector for the Minimum Wage, only 17% of jobs are below the living wage and raising the Minimum Wage to the Living Wage would only add 6% to the wage bill. This is the highest impact for any sector. More importantly, labour is only a proportion of all costs, e.g. 25-35% for restaurants. 

4) The current Minimum Wage is a very low baseline. Since it was created 15 years ago, the Minimum Wage has largely eliminated the exploitative wage rates ( in some cases only £1 per hour) which used to exist. A good, but limited job. But it is now just £6.31 and its value in the last few years has declined. It only covers 4% of employees, just 1m people. This rises to 6% in the North East and falls to 2.5% in London. 

5) We do not need to continue with a single National Minimum Wage. This has held down the wage to the lowest common denominator. Concerns about the impact in, say, Sheffield have left the Minimum Wage meaningless in London. We can and should have more than one geographically based level. 

6) The Minimum Wage is an hourly rate, rather than a weekly wage. So it impacts on how many hours an employer wants to buy, rather than forcing a binary decision between hiring someone or not. The same is true for workers deciding how much to work.  Just over a quarter of employees are part-time ( nearly 7m people), but over 5m of these are women. More than 4 out of 10 women work part-time. Hourly rates for part-time workers are much lower than for full-time workers, e.g. the median hourly rate for full-time women is £12.00, but only £8.12 for part-time. So the Minimum Wage hourly rate could be a big deal for part-time workers.

7) There are a number of ways that the Government can compensate employers, if it wants to. Increasing wages helps the Treasury. It reduces the cost of in-work benefits and increases taxes. Moving to the Living Wage would make government nearly £4bn better off. For every £1 increase in low wages, the Government will be 50p better off. (Some say less because they have to pay public sector staff more. But I wouldn’t give into this. The public sector has many of the flexibilities of the private sector to soak it up – e.g. restrain pay growth for the better-off or improve productivity). Government could give some or all of this 50p back to employers. This could be across the board (e.g. via a cut in employer NI contribution). Or it could be highly  targeted. There are only two sectors which are seriously challenged by an increased Minimum Wage – retail/wholesale and hotels/catering. A key cost for both sectors is business rates. This could be reduced by a discounted rate specifically for their type of premises. 

7) This is the right time to do it. Growth and optimism are back in the economy. Jobs are growing. Wages are rising. Those with the broadest shoulders were asked to take the strain of deficit reduction (e.g. reducing child benefit to higher rate taxpayers).  It is equally right that as the country gets richer again the poorest of the hard working families gets a bigger share of the new wealth. 

So if we can safely increase the Minimum Wage a lot, should we do it? The fairness arguments are compelling. The working poor are doing the right thing – they are working. But their incomes have fallen and their fixed costs have risen sharply. Beyond the fairness arguments, there are at least 4 reasons to go big: 

1) Through the welfare system we are guaranteeing minimum incomes to those in-work. If wages are too low, then the cost to the taxpayer is excessive. For example, the median 2 child family with a median single full time wage and a median private sector rent in the South East will get £200 per week in benefits, which is 40% of net income. And this is the median earner! Whilst businesses save on wages, they have to pay taxes to fund these wage subsidies. If there were no in-work benefits, there would be no need for Corporation Tax. We need to rebalance wages and benefits.

2) Low wages where employers don’t have to meet the income expectations of their staff are a recipe for low productivity. Productivity in low wage service sectors is poor and not improving.  The wage subsidies through in-work benefits mean that the incentives for productivity are blunted. If staff cost employers more per hour, employers will more focus on getting more for their money. Whilst in a recession it was tempting to tolerate falling productivity and wages to protect employment, as we grow and want to increase wages it will be disastrous if don’t drive up productivity. Employers paying more is a good thing. It is a route to greater productivity, which is the route to rising wages. 

3) We need more people to work, those who work to work more and all workers to earn more through producing more. The story of of the last decade for low to middle income households is one in which men have brought home less in wages, women have brought in more but not enough to compensate for the men and families have depended on tax credits to balance the books. Lifting the minimum wage won’t be enough on its own. Poorer households will need all adults to work and as many hours as they can. An attractive Minimum Wage can incentivise this. 

4) The Coalition Government (and Labour before that) have introduced a wide range of generous (and expensive) schemes to assist the working poor. This includes tax credits, raising the personal allowance for income tax and Universal Credit. Unfortunately, they are, by necessity, far too complicated for most people (almost everybody) to understand, or remember. By contrast, everyone understands what an hourly wage rate means. One of the Conservative’s strongest slogans is “Making Work Pay”. Through Universal Credit, they are working imaginatively to reduce the marginal tax rates for poorer workers. But given the need to incentivise more people to work more, it is vital that not only does work pay, but that is seen to pay by ordinary people. Shifting the balance in poorer people’s income from benefits to wages can make this difference. Utlimately, a tax-free minimum wage would be the easiest thing to explain. 

So, what should the level be? There is no real evidence of any minimum wages in the world adversely effecting employment levels. But then that shouldn’t be a surprise as the level is always set to avoid any impact. There is a built-in over-caution The problem with that is that we never learn about what’s possible or how labour markets respond. In most markets, things proceed by trial and error. We need to try a more radical level of the Minimum Wage. I propose that we reset the Minimum Wage, after its first 15 years, at the current lower quartile wage rate. That means that 75% of employees earn more than this wage rate. Resetting the rate at this level would mean that a quarter of the workforce would have the protection of the Minimum Wage, compared to just 4% now, and an uplift in their incomes. The rate should be easy to remember (who can recall £6.31). We could announce now the figure for October 2016. If we set one level for London and one for the rest of the country, it could mean an adult Minimum Wage of £8 per hour (at today’s prices, a £1.40 or 20% increase) in most of the country and £10 in London (a £3.40 or 50% increase). These can sound excessive. They are ahead of the Living Wage proposals of £7.80 and £8.70 (at comparable prices). I can hear the reactions now that the London level is absurd.But it is the current London level which is absurd, not £10 in just over 2 years time. We are playing a lot of catch up. And remember that 75% of people earn more than these levels and only 4% of workers would get this full increases. In London the full headline increase would only apply to 1 in 40 workers. Most other people would get only a proportion of this increase, some only a small proportion. But for those who get the largest gains, it is life changing. Someone working full time and getting a £1.50 increase on the minimum wage would have the dignity of earning nearly £2,000 a year more, enough to cover all the utilities bills. Someone who gained just 50p a year would be £900 better enough which might be enough for their energy bill. The fiscal savings are so big at this level that employers in the 2 most affected sectors can be generously compensated with tax reductions and this could be extended more widely. Local authorities deserve some help to fund slightly higher prices in social care.
These new rates could be introduced in October 2016. Thereafter, the annual increases can be restrained or accelerated in the light of the evidence of how the economy responds to the new rates. If the new rates are a bit too high or too low , they can be varied later. 

Coming back to Nixon moments, it is interesting to note what happened to wage rates after his visit to China. In 1974, he resigned over Watergate. In retrospect, the more important history in the making was that 1974 was the first year after World War 2 that US wages declined. It was the beginning of a 40 year bad period for US wages which largely stagnated. Meanwhile, Chinese urban wages have risen 4 fold in the same period. So the biggest impact on low wages in our lifetime came from a Nixon moment. Are we up for another one in the UK? 

 

 

 

The traditional high street is a Class A drug – what better time of year for cold turkey?

For all the noise this week about how UK retailers fared at Christmas, it feels as though we are missing the real debate we should have about the future of our shops – which is that vast numbers of them don’t have a future. And we would be better off accelerating this trend, not trying to hope for a miraculous remission from their terminal disease.

So far we haven’t been able to face up to this. No matter that our consumer preferences are now clear – we buy from larger shops in fewer locations, or online, or, now with click-and-collect, both at the same time! In policy terms, we want to have our cake and eat it … or at least have lots of little cake shops, but only ever shop at the big one. All politicians, local and central, are penned in by the public’s political preferences for a traditional high street. But the same public is the consumers whose spending preferences don’t match their political sentiment.  And you can see why people say they want to preserve the traditional high street. Change only has negative outcomes in our current system. Planning restrictions mean that if  shop locations are no longer economically viable, they aren’t replaced by something different and better. Instead, they either sit vacant (as one in five shops now do in the North and Midlands) or they are used by charities (who don’t have to be viable, as they don’t pay tax or wages). In the many sub-prime locations, even when shops are economically viable the growth sectors taking over the high street (betting shops, pawnbrokers, nail bars) are often perceived to be symbols of decline. So, no wonder that the public wants to avoid this slippery slope. 

However, there are strong economic arguments for forcing the pace of change in retail. Retail is 10% of the UK economy and workforce. That’s the same proportion as manufacturing.  If we count wholesale suppliers too, it rises to 15%. Our best retailers are the very best in the world. They are highly productive, fiercely competitive and tapping into overseas demand. But too many of our shops are unproductive, unsustainable and a poor use of the assets (human and buildings) which are locked into them. They are managing decline and just hoping to keep as long as possible. If we want an economy with higher productivity, higher wages, more exports, less dependency on consumption and one which puts its assets to most productive use, why would we resist structural change in retail, prop up failing businesses and prevent ourselves doing something better? The most recent UK government review of the high street in Autumn 2013 said that nearly half of all retail businesses were officially zombies (that was the term they used). And this rose to two-thirds for the smaller retailers. Even if online didn’t exist, we have too much retail space. Between 1971-2004, we added 54% more space in the UK. Always adding, rarely scrapping. At the same time, the number of outlets employing 100 or more people grew by 6000%, whilst the number with 9 or less staff fell by 54%. And then there is online. It looks like 20% of all shopping for Christmas 2013 was online (vs 15% the year before) and for non-food items it was 30%. The major destination shopping centres, the best department stores and supermarkets are faring well. But the less prime locations are declining. Sector specialists suggest that 30% fewer town centre stores will be needed by 2020. Town centres which comprised 50% of sales in 2000 now represent just 40% and falling. Outside London, rents for shops fell by 20% between 2008-12. In some big cities they fell further – e.g. 31% in Leeds and 27% in Nottingham. 

This is clearly a historical moment.  But will we actively shape the history? The one thing that history teaches us is that you don’t want to be a loser because it won’t be kind to you. When Napoleon said that “England is a nation of shopkeepers” it was a term of great respect, not an insult. With just half the population of France, Britain was formidable due to its stronger economy. In fact, the term “nation of shopkeepers” was popularised by a Scot, Adam Smith, who worried in 1776 that imposing a British empire on the world in order to create customers for British business was “a project fit only for a nation of shopkeepers”. He softened this to say ” or a nation whose government is influenced by shopkeepers”. And it is hard for any government not to be influenced by shopkeepers – all 300,000 of them, big and small, plus their 3m staff. But another person to whom history has not been kind (though nor was he) is King Cnut. He is mis-reported. When he tried to turn the tide in front of a crowd, it was not a futile act of vanity, but actually an ostentatious act of piety. He was proving, as a Christian, that in spite of his being the all conquering King of England, Denmark and Norway, he as a mortal had no power over the waves, unlike God. Politicians, local or national, can’t turn the tide of what is happening in retail. Perhaps they would be better to do what Cnut really did and affirm their inability, rather than do what Cnut is (falsely) reported to have done. The outcome will be the same either way. The tide is on its way. 

I think the public now gets it. People see the difference between structural and cyclical change. They know how they are shopping. The real political choice is whether to slow the rate of change or accelerate it. So far, slowing it down is the order of the day. There are a couple of things which currently slow the rate of change.

Firstly, it is hard to change the use of shops. The most obvious option is re-use the sites for much needed housing. The government is consulting on whether small shops might have a bit more freedom to change. But this is a bigger problem. In the UK, shops are classified as “Class A” and this is the toughest class to convert into other uses. In the UK, we use the same term “Class A” to cover the most prohibited drugs. It can feel like one is as addictive as the other. Isn’t this a good time of year to go cold turkey and wean ourselves off the restrictions. This can’t be about the odd shop here or there. We could give much broader rights to change use. Or maybe we need a more dramatic act. Various sector specialists suggest that we need to lose a third of retail space in the next 10 years. Why don’t we require local authorities to have a statutory plan to convert at least 30% of their retail space for housing?  In some cases, it may need to be higher given existing vacancies. In some prime locations, by exception, it might be lower. This could go as far as removing the right to operate a shop in the declassified properties. The plans could be produced after extensive local debate, which could help build ownership of the changes and a vision for the future, rather than nostalgia for the past. The solutions might be unexpected – e.g .maybe it is the 1990s big boxes which are voted out and become new housing, or maybe town centre retail areas become very compact, or even vertical, but with lots more people living on the doorstep in former shop sites and recreating in the area.

Secondly, there is also the sensitive issue of business rates. When shop premises can only be shops, it makes sense for government to give tax relief to non-economic shops. And in this context, one’s heart goes out to the very small businesses struggling to balance the books, aided by the small business relief.  However, these reliefs are a lot of money, of the order of £2bn per year, propping up operations which are not sustainable. If shop premises can, or indeed have to, be easily and quickly changed to other uses, then the arguments for business rate relief disappear. As do, probably, lots of charity shops and very marginal businesses. There is a counter-argument which is that business rates should be charged on online sales to create a level playing field. This is superficially attractive. But business rates are a property tax. Online businesses do pay them, for offices, warehouses, etc. Why should they pay more again to punish them for their more productive use of assets? Isn’t it better that property taxes incentivise the best use of (relatively) scarce property? If non economic shops are converted into housing developments, then those properties will then pay Council Tax on the property they use. 

Thirdly, there is community willpower. At the moment, a lot of energy goes into fighting change and wishful thinking. Letting go and embracing the future, could  redirect this energy into creating new and better businesses, jobs and local communities. 

Just in case you think my “Bah Humbug” spirit has lasted longer than Twelfth Night, I admit to the same sentimental conservatism about town centres as the next person. But how we approach these retail changes tells us a lot about how willing we are to grasp other difficult nettles throughout the economy. If we want a dynamic, more productive and sustainable economy, then we will have to accelerate the pace of structural change in many areas. It is indeed a time for hard decisions. Creative destruction always looks more like just destruction if we see it as a discretionary choice But it looks more creative if we see it as an inevitable change that we want to embrace and shape. What we do know is that the closure of shops will release hundreds of thousands of entrepreneurs to try their hands at other businesses – a nation of shopkeepers on the move. At least we will have the French worried. 

A simple idea to sort out the housing market and make the economy boom for the next 5 years

It’s time for drastic action in the English housing market. Home ownership levels have plummeted, housing construction has never been lower, new homes are the smallest in Europe and housing costs could stifle the places with the highest potential for growth. The problem is simple – we need more and better homes and we need to allocate more land on which to build them in the places where people want to live. Unfortunately, most of the players in the housing market are incentivised to keep supply limited and prices high. Local authorities have acute community pressure to limit new housing, especially where demand is high. Developers will only build at a rate which keeps price high. Home owners will only sell when the market gives them a high price. These trends are intensifying. Meanwhile, the desire to create new households continue to grow twice as quickly as housing supply. As it’s done this for many years, the shortfall in supply means that we need 2 or 3m more homes in the next 5 years to play catch up. In the last 5 years, we’ve built little more just half a million new homes.  Even in the boom years we haven’t done better than 1m new homes in a 5 year period since the 1960s. 

Here is an idea to sort things out. At well as tackling the housing market, the rate of building would guarantee a massive economic boom. And it more than pays for itself. 

There are 4m social homes in England. That’s nearly one in five of all homes. My simple idea is that whenever one of them becomes vacant it should be sold as a private home. They are worth an average of £120,000.  Even if they only become vacant once every 20 years on average, that means that half of the stock will be sold within 10 years. That’s 2m homes. And that generates a receipt of £240 billion.

The first step is to replace the social home sold with a brand new one. Then no one can complain about the loss of homes for the very poorest. The subsidy required for a new social home is about £50,000. So that would use £100 billion. But we would have 2m more homes. 25m, rather than 23m homes. We would have no fewer social homes. The new social homes would be brand new, cheaper to heat, etc.  The 2m homes that were sold off would become low cost private homes for rent or purchase. A real help to those who struggling to find affordable homes.

The second step is to build the new houses quicker than the old ones are sold off. The Treasury can guarantee that £240bn of receipts will be raised from sales over the next decade. So it can get on with the building right away. If all 2m homes were built in a 5 year period, that would guarantee the highest levels of annual house building ever seen in the UK. This 400,000 homes per year compares with just 150,000 in an average year – and thats not even counting those built in the private market. One could safely assume that more than 500,000 homes would be built each year. Each 100,000 homes equals 1 per cent extra GDP. So the extra 400,000 homes would add 4 per cent GDP every year for 5 years. The economic boom would be unstoppable. 

But it doesn’t stop there. There’s a third step. We still have £140 billion to spend. Just under £40 billion should be spent to clear the debts on the social homes that were sold. Then no-one will miss the rents they got on the old social homes. The other £100bn should be spent on creating beautiful new garden cities, plus some new garden suburbs for existing cities. To accelerate building, the Government should do two things. Firstly, it should grant planning permission for the new places at a national level. Just as it did for new towns and the docklands in London. Secondly, it should directly hire builders to put up the new homes, cutting out the major national developers. That would mean that government controlled the speed of building. It wouldn’t matter if it took a while to sell the homes. If we assume that, with all the new infrastructure but without the need to make a profit, the new homes cost £200,000 each our £100 billion would build 500,000 new homes. That’s about the size of Bristol. I would create 3 new garden cities of 100,000 new homes and add 5 garden suburbs of 40,000 to cities like Oxford and Cambridge. But the good news is that the Government would get it’s money back when the houses sold. That money could be rolled over into the more new places, and then more again. Over a 10 year period, the money could fund 1m new homes. That’s 2m or more people living in beautiful new places. And we’d still get our money back. Alternatively, the Government could decide not to have the money back and subsidise the new settlements, e.g give everyone who moves in a council tax holiday for 10 ears, or a major price discount, or both. 

Let’s recap on the proposition. Within 5 years we would have an extra 2.5 homes in England. If we assume that the private market still builds its normal 100,000 per year, that’s 3m more homes. We would have built as much in 5 years, as we built in the last 25 years! If some of that was skewed to high demand areas it could mean up to 50 per cent more homes in the places that people want to live. We would have no fewer social homes and those we had would be newer and warmer. 2m low cost, former social homes would enter the private market. A further 500,000 private homes would built rapidly in new beautiful garden cities and suburbs. In addition, we would have paid off £40bn of debt and still have £100billion back in cash when the new homes are sold. If we built all the new homes in 5 years (and we could, and we should) then in each year we would have built an additional 500,000 homes, equivalent to 5 extra per cent on GDP in each of 5 years. For those who think that 5 years is absurdly ambitious, I suggest they visit Asia and see what our competitors are achieving. 

Yes, there will be people who don’t like the plan. Social housing providers may not like the compulsion. There will be huge outcries from areas chosen for new settlements. Local councils won’t like ceding planning powers to the national level. Major developers won’t like government as a mass house builder. But the housing supply problem is now to big not to be offensive to someone. It’s just about taking sides and either giving offence to those who are denied an affordable home or to those who need to step out of their way. Because there is a way, if we want to take it.