Philp Hammond needs to show some Peelite radicalism

Those who are accustomed to seeing Britain as an essentially market-based society, home to the City of London and a redoubtable property-owning middle class, need to think again. The Labour Party just held its annual conference and, incredibly, it is winning the economic argument.

On everything from housing, to tax increases, to student loans, to redrafting PFI contracts, to nationalising utilities, it is Labour’s socialist vision which is chiming with the electorate, as evidenced by an alarming report on the anti-capitalist state of British public opinion by the think tank Legatum published this weekend [29^th September LINK ]. For instance, some 76% support renationalising the railways and 83% renationalising water companies.

Next week, it is the Conservative conference and while the media is focusing on what the Prime Minister Theresa May might say, actually it is the chancellor Philip Hammond who has the bigger task. Only he can address the economic concerns exposed by Jeremy Corbyn’s rise. What is more, if we are going to make a success of Brexit, what we do ourselves to enhance productivity, spread prosperity and attract investment is going to be just as important as the details of any exit deal.

Sadly, nothing in what Mr Hammond has said so far suggests he has any appetite for the radicalism necessary to respond to the Corbyn challenge. We must hope that this is a cunning ruse and he has in fact spent the last few months preparing a secret plan. What we want to hear from him is a robust, optimistic defence of an enterprise, market economy, accompanied by an honest programme to “the correction of proved abuses and the redress of real grievances” as the great Victorian Conservative reformer Sir Robert Peel promised in his Tamworth Manifesto.

What explains Corbyn’s rise is not simply the Zeitgiest , or social media, or an inevitable swing of the political pendulum, but the fact he is actually addressing real experienced consumer grievances like, for instance, rents rising faster than wages or rubbish and expensive trains.

The broad economic consensus around what one might describe as Osborne-ism – reduce the deficit, cut corporation taxes, and rely on monetary activism to stimulate growth – has completely collapsed. This is because its time has passed. It got us out of the financial crisis, but only at the cost of creating too many losers, especially among the young.

However, young people are in employment, so their sense of animus is derived not from lack of a job, but other insecurities, notably shrinking disposable incomes (compulsory pension contributions following student loan repayments as the latest deduction), and a lack of capital and adequate housing. It is also my firm impression that there is a sense that some companies, like airlines, train companies and BigTech get away with murder because the Government is too complacent to stand up to them.

When set alongside the high rates of income tax, the ongoing corporation tax cuts are looking like a bung to large and unscrupulous companies. Ultra-low interest rates and quantitative easing have deepened company pension deficits (which have to be filled by young workers) and pushed up asset prices, thereby creating a chasm of generational unfairness. Mark Carney, the Governor of the Bank of England, is Jeremy Corbyn’s unwitting recruiting sergeant.

The Bank is at last indicating that it may raise interest rates, perhaps as soon as November. This potentially dangerous inflection point gives Mr Hammond the perfect excuse to revisit Government policies and to work with the Bank to wean us gently off the drug of cheap money. What we need is some fiscal and monetary methadone, so we do not lurch from dependency to a crash in a few short months.

The place to start is with housing. Sajid Javid has made some progress in the Housing White Paper to address the planning system, but with the Treasury encouraging a boom in over-priced flats with both its tiered stamp duty rates of up to 12% and the stoking of a corporate buy-to-let boom, fiscal policy has piled more distortions on top the distortions of monetary policy. Mr Hammond should cut stamp duty to a flat 1% for both buyers and sellers on all properties and then flatten the forest of property-related VAT rates to a level 20%.

A reform of property taxation to a more rational system would make the market work more efficiently and stimulate housebuilding, including the construction of proper family houses. It should be accompanied by regulatory measures, such as restoring the minimum size rules for flats and introducing compulsory licences for landlords in return for their tax breaks (both Labour policies opposed, incredibly, by the Conservative party). Help to Buy, Starter Homes and all the other foolish interventions which have pushed up prices and enriched the big housebuilders should also be scrapped immediately.

Mr Hammond must next address the running sore of the student loan system. Incidentally, we could ask Steve Lamey, the chief executive of the Student Loan Company, for his advice, but he has strangely disappeared. As he was a previously highly regarded person from HMRC, we must be suspicious of his continued suspension by the Company due to a mysterious investigation. If somebody could please find him and find out what has happened, they would do the nation a service.

Given the gravity of the situation with the student loan system (which is effectively bust), Mr Hammond should announce an urgent review, so we can get to the bottom of what has gone wrong. Such a review would examine raising or staging the repayment threshold, putting the system on a proper legal footing and bring it under the aegis of the Financial Services Authority (it is currently unregulated). In the meantime, he should immediately cut the interest to the pre-2012 rate of 1.5%. 

The next leg of economic reform should be to encourage investment, especially in infrastructure. I have numerous friends who commute via road or train and all of them have horror stories about overcrowding, delays and high prices. This has been caused by population and economic growth not being matched by investment since the financial crisis. This, in turn, has held back productivity growth.

According to the Office of Road and Rail, public investment in rail was £4.8bn in 2015-16, substantially down from its peak of £7bn in 2005-6. Of this, nearly £1.3bn was gobbled up by HS2 and CrossRail. (1) Indeed, the House of Lords Economic Affairs Committee has said that on a per mile basis HS2 costs nine times as much as the TGV, the French equivalent (2).

The causes of lack of investment in transport would require an essay in their own right. They include Treasury cuts, poor productivity at Network Rail (a nationalised company, take note); faulty franchise contracts for train operators (eg Southern Rail). The syphoning off of money to pay for HS2 can only make things worse and the failure to introduce sufficient private investment via, for instance joint ventures.

Again, only a forensic review will get to the bottom of this, but in the meantime Mr Hammond can announce the creation of a project bond market to allow semi-autonomous public/private partnerships in rail, roads and housing to borrow cheaply, financed by tolls, fees and rents, but with a partial guarantee from the Treasury or local authorities. 

The sense that something has gone badly wrong with the money and that Britain is being exploited by unscrupulous international investors also needs addressing. It is a little known fact that the big City institutions, like our pension funds, have spent the last decade dumping UK shares in favour of gilts, with the consequence that, according to the Office for National Statistics, they only own a combined 10.1% of the FTSE 100. In 1998, our pension funds owned 21.7% of UK equities, that has been reduced to a paltry 3%. The sold another £6bn in the second quarter of this year. Foreign investors now own more than half of the index. No wonder our tech companies are all being sold on the cheap (3) (4).

I fear that properly addressing this complex long term issue will require another review (sorry about that), but the creation of an independent Sovereign Wealth Fund to act as a long term investor in British companies and infrastructure would be a start. It could be gifted government assets, such as the shares in RBS, to get it going.

These ideas are necessarily brief and they not exhaustive. I have not touched, for instance, on enhancing consumer protection legislation for the digital age; or the need to ensure BigTech companies are properly regulated and taxed as French President Emmanuel Macron has, perhaps overzealously, suggested (5); or binding votes on executive pay; or cutting daft taxes like air passenger duty on domestic flights and small business rates.

But the main thing to get across is that Jeremy Corbyn is winning. He is growing stronger and getting closer to Downing Street every day. Labour is ahead in the polls, by 43% to 39% according to YouGov (6) and has fire in its belly. The great institutional pillars underpinning our market system – the Treasury, the Bank of England, the City and indeed all of us who work in that system – must wake up. It is time for a well-aimed Tory kick in the backside. If it is not administered quickly by Mr Hammond and his Conservative colleagues, then the Labour lynch mob will apply more painful and destructive measures of their own. That would not only be counterproductive, but be infinitely more horrible too.

Footnotes

1. Office of Road and Rail, Finance, Annual Statistical Release 2015-16 http://orr.gov.uk/__data/assets/pdf_file/0005/22982/rail-finance-statistical-release-2015-16.pdf
2. House of Lords Economic Affairs Committee, the Economic Case for HS2 https://www.parliament.uk/business/committees/committees-a-z/lords-select/economic-affairs-committee/news/eac-hs2-press-release/
3. Office for National Statistics, Ownership of UK Quoted Shares 2014 https://www.ons.gov.uk/economy/investmentspensionsandtrusts/bulletins/ownershipofukquotedshares/2015-09-02#main-points
4. Office for National Statistics, Investment by Insurance Companies Pension Funds and Trusts April to June 2017 https://www.ons.gov.uk/economy/investmentspensionsandtrusts/bulletins/mq5investmentbyinsurancecompaniespensionfundsandtrusts/apriltojune2017#main-points
5. Financial Times, 29^th September 2017, Macron Slams Anglo-Saxon Tech Giants https://www.ft.com/content/efe954f4-a53a-11e7-9e4f-7f5e6a7c98a2
6. YouGov Westminster Voting intention (24^th-26^th September 2017) https://yougov.co.uk/news/2017/09/27/voting-intention-conservatives-39-labour-43-22-24-/