The private sector vs. definitions of fairness

October 25, 2010

— Ingrid Smith is Business Planning Editor,  Reuters Consumer Television —

Sitting in the auditorium of the London School of Economic’s Old Theatre earlier this month, I listened to Lord Turner pose the question – in rich societies is there a clear correlation between increased wealth and human well being?

An apt question indeed from the chairman of the soon-to-be-defunct UK Financial Services Authority, in light of the UK coalition government’s austerity review.

On the international stage, the OECD has described the spending review as “tough, necessary and courageous.”

In other quarters it is viewed as excessive by political pundits, such as Scottish Finance Secretary John Swinney. He argues the cuts are almost twice the level recommended by the International Monetary Fund for developed countries.

The predication by David Cameron’s government – and to a lesser extent Nick Clegg’s – that fairness was and is at the centre of their economic and welfare management of the country poses the unavoidable question – how is fairness being defined?

Lord Turner argues the average worker views economic fairness from a relativist’s perspective i.e. — ‘I’m happy to earn X for the work I do until I find out someone else is earning Y (where Y is more!).’

The UK government has in part translated this relativism as ‘We are not happy to have ‘A’ work while ‘B’ allegedly sits back and lives off A’s taxes and the state.’
There is no denying the public sector was unacceptably bloated – and possibly still needs further sensible restructuring beyond the austerity review – or that the welfare system needed overhauling.

But critics haven’t been slow in both penning and voicing their objections to the welfare elements of this review; the independent economic think tank, the Institute for Fiscal Studies, stated at the end of last week that the poor will be hit most by the government’s 81 billion pound cuts (18 billion of which are welfare savings), which it has called “regressive“.
According to the IFS’s household income calculations, in real terms families with children will lose out by around 6.7 percent, pensioners by 3 percent and those on higher incomes by 2 percent.

Is it then a case of just taking from those sections of UK society that are too powerless or aren’t appropriately articulate enough to be heard or acknowledged?
Nick Clegg has dismissed the IFS’s comments as “distorted and a complete nonsense”, (Guardian Newspaper), questioning the think tank’s method of measuring the fairness of the review.

He told the BBC that the IFS has only taken into account tax and welfare while ignoring access to public services and social mobility.

And so the debate at this stage still has done little to define what fairness means in the UK today.

Certainly, the country is faced with a relatively young Tory party which has proven linguistically-correct enough to appeal to the mores of a widely middle class middle England audience.

But this is of course an importantly distinct group from the urban middle classes, arguably less focussed in terms of a distinct economic moral compass, but politically wavering enough to oscillate between the consumer-led right and all-for-one liberal left.

The dichotomy is therefore perhaps more complex for the latter group; many of whom seemingly struggle to balance their support for opaque notions of fairness, while not being able to move too far away from one of Lord Turner’s propositions: In developed nations with discretionary (disposable) wealth, consumption-for-consumption-sake is closely linked with the notion of increased (and desired) status.

Briefly taking this point further, Turner therefore agues that consumerism cannot be the final path to happiness and contentment; the more there is to buy the more people will buy, in a never-ending cycle proffering little contentment – an argument for another day perhaps.

What is an argument for today is ‘how much will the private sector be able to pick up the slack in terms of economic growth and job creation?’

It doesn’t take a genius to realise this sector’s growth will of course will be greatly reliant on consumer spending, to bolster the UK’s economy and help pay down the current 109 billion pound deficit – through both taxes and treasury bond issuance investments.

A general estimation in the markets is that an equal number of jobs will be lost in the private sector, as a knock-on effect, to match the government’s estimated 490,000 that will be lost in the public sector over the next four years.

The outlook for this sector could fairly be viewed as relatively bleak.

Seemingly in an effort to reduce this burden, the government offered some salves to the private sector during the spending review announcement: The increase of apprenticeship places by 50 percent taking the number to 75,000 annually; the ring-fencing of university science department budgets – projected to be worth over 4 billion pounds – according to the chancellor (finance minister), George Osbourne. And half a billion pounds extra funding for regional growth in 2012/13.

But will initiatives like this be enough to ensure growth for manufacturing, industry and service sectors?

It doesn’t take much to realise that one sector which will be heavily relied on for growth will be financial services.

It’s unsurprising then that some argue the coalition took a politically cynical step to solely reassure investors and not to also protect the poor – something that will come back to bite if recent social and industrial demonstrations and strikes are anything to go by.

The UK is the second largest financial economy in the world, second only to the United States, and the government has prioritised the value of investment – both domestically and on the international stage – in a move to not scare this income-base too much.

But has the sector got off too lightly?

Beyond Basel III new capitalisation rules, the government has of course introduced its banking debt tax levy. This levy equals less than 0.1 percent of banks’ profits and is designed to raise 2.5 billion pounds annually for the treasury – some critics say that figure should have been nearer 20 percent annually.

The British Banking Association states on its website: “The banks are committed to playing their part in restoring the UK economy – and that includes helping to meet the greater demands on the Exchequer.”

But Paul Myners, (former Financial Services Secretary in Gordon Brown’s Labour government), speaking on BBC Radio 4’s ‘Today’ programme, (22 October, 2010), argued the levy “will be passed on to those small businesses which can’t afford to relocate.”

Beyond debates around the levy, wider questions are still being posed about the need for even more banking regulation. About the impartiality and governance of rating agencies, the competence of bank inspectors and trustees, and significantly, of financial advisers – especially those still selling derivatives bundles to unsophisticated clients along with promises of alpha returns.

If the UK economy – which admittedly is unlikely to be in for a double dip, but is certainly in for an economic awakening – is to rely so strongly on the financial industry, there is strength in an argument which calls for these points to be seriously revisited more than once.

But, these of course are ultimately debates for legislators and financiers; amongst the general population there are already signs that wider public debates opposing the spending review are, as Nick Clegg argued, succeeding in “frightening people“.

The coalition has announced the closure of 192 quangos and, as much as it irks to fall back on proverbial imagery, it does beggar the inevitable ‘baby/ bathwater’ question, as a number ordinary people view some of these decisions as arbitrary – particularly in UK regional areas.

Coupled with a third of savings in public spending over the next four years, the debt ridden but canny householder may argue: certainly I can budget for a reduction in expenditure and even pay the in-laws back those generous loans, but it’s just as important to make sure I have a secure basic and sustainable income that won’t leave the cupboards totally bare and the rent unpaid.

Translating this to the government’s management of the wider economy, proponents of the argument that seeming drastic austerity is not always canny economic management – despite Mr Osbourne’s and Mr Clegg’s reassurances – are unlikely to retreat from the stage any time soon.

However, perhaps it is just a case of the government better- clarifying its economic policies, for example, for those concerned people currently receiving sick benefit, state pensions or living in social housing.

Lord Turner made the point in his LSE lecture that inequality will always matter to the bottom economic group where that group may be poor but still sees itself participating in a relativist income society.

If the liberal-left arguments around the review are incorrect and the cuts do not result in an increased group of poor-dispossessed, the government could still find itself faced with an ironic problem. That of an overly expectant group of unemployed or small wages earners, looking for elusive fairer correlations of equality in this cash strapped work market place.
Perhaps the test of how ferocious the fallout from this problem will eventually become, depends on how well David Cameron’s linguistic powers of persuasion are able to successfully filter down to the proverbial working classes.

In delivering his message of ‘the Big Society’, he seems to have secured the views of a number of the middle classes for now. But unless he can better define notions of fairness, particularly in relation to the vulnerable, the poor and – let’s not forget – the actual dispossessed, realisation by these weaker groups that some are all-in-it-together a little more than others, may prove his biggest burden.

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