So what would you do in 2009?

12 Jun 09
Everyone has a view on the government’s mistakes. But coming up with solutions is another matter.
By Colin Talbot

16 January 2009

Everyone has a view on the government’s mistakes. But coming up with solutions is another matter. Colin Talbot takes on the challenge with a 2009 wish list that includes a financial regulatory framework, a crackdown on fraud and a high-speed rail network

In December I gave evidence to two parliamentary select committees – the Treasury committee on the Pre-Budget Report and the public administration select committee for their inquiry on ‘good government’.

At the Treasury committee, Tory MP Graham Brady, asked me the question that sends shivers down the spines of many academics: ‘What would you have done?’ He was asking about alternatives to reducing VAT as a fiscal stimulus. I then got asked several rather similar questions at the PASC. Its subject was ‘good government’ but both sets of questions – what constitutes ‘good government’ and what should governments do to protect people in a financial crisis and an economic recession – are not really that different. They both ask: what is the proper role of government in a modern, globalised, advanced democratic state?

So here’s my New Year’s wish list about how to get better government – or at least better public administration – and also what our government should be doing in the current recession.

Regarding financial regulation, there is a pretty broad consensus – apart from a few rabid free marketeers – that we need a new regulatory framework for the financial sector to discourage the sort of lunacy that very nearly led to a global financial collapse. The answer is also pretty obvious – financial systems are essentially networks of deals, loans, guarantees and insurance.

We know very well that the more highly integrated and efficient such systems are, the more they are also – unfortunately – highly susceptible to catastrophic failures. To be secure, they need some built-in inefficiency caused by the need for some duplication to avoid collapse. And they also need some barriers and blocks that prevent failure in one area cascading through the system. This reduces the possibilities for innovation, but we have seen the consequences of unconstrained innovation in financial markets.

Just these sorts of restrictions were put in place after the great crash of 1929. But they were gradually eroded through the 1970s and 1980s in the name of ‘deregulation’ – not least in the famous ‘big bang’ of City deregulation in the mid-1980s. We need them back. Barriers need to be put in place between different financial sectors – licensing financial institutions to perform a narrower range of functions. So-called new securitisation instruments, such as credit default swaps, need to be treated for what they are – forms of insurance – and regulated as such.

Making markets work fairly and honestly is a legitimate role for the state – we have seen the opposite in recent years and some of what has gone on is what most people would consider as tantamount to fraud and theft. We might yet see – especially in the US – some of the perpetrators going to jail. It’s a pity our UK authorities aren’t being as rigorous.

And, while on the subject of regulation, there is one big area which none of the political parties has yet dared to tackle, which could have a significant impact on the public finances – the scale of the shadow or hidden economy. In December, another parliamentary committee – public accounts – published a report putting the size of tax losses from the shadow sector at £2bn and the number of people involved at more than 2 million.

The PAC relied on Revenue and Customs’ estimates and these are ludicrously low – £2bn in lost revenue would mean the shadow sector was only about 0.5% of gross domestic product. But the best international estimates put it at more like 12% of GDP (lower than the Organisation of Economic Co-operation and Development average of about 16%–17%). This is the equivalent of more than £150bn in shadow activity and losses of £50bn plus in tax and national insurance revenues. While the size of the shadow sector remained relatively static during the early 2000s (which it usually does during a boom period) it will almost certainly expand again during the recession.

Any policy that could get these figures to go down would aid the public finances enormously. Just halving it would probably shave £100bn or more off the cumulative public spending debt by the end of the next spending round (more than enough to pay for some of the things I’m going to suggest below). Achieving this is trickier – no-one has had much success internationally. But, then again, few governments have really tried.

What certainly doesn’t help is R&C’s policy of effectively giving people amnesty – it collects only about 3% of estimated tax losses from those who come in from the cold – while saying it will collect everything you owe. A full-scale, well publicised amnesty followed by a crackdown would probably be a better option.

My next suggestion is more positive: wire Britain. We made a huge mistake back in the mid-1980s (again) when British Telecom was privatised and the telecommunications system liberalised. Already it was obvious that we were headed towards a future where high-speed telecommunications access for every household, school, hospital and business was going to be a crucial factor.

Prime Minister Gordon Brown hinted that such a project would make sense in his recent Observer interview: ‘When we talk about the roads and the bridges and the railways that were built in previous times – and those were anti-recession measures taken to help people through difficult times – you could [by comparison] talk about the digital infrastructure and that form of communications revolution at a period when we want to stimulate the economy. It’s a very important thing.’ Important it might be, but so far there has been little detail of what might be planned.

This is a case where there really is a ‘third way’ solution. It is not a case of either the market or the state – both could benefit. It is obvious that the private sector did not – and will not – cable Britain with optical-fibre the way they did with railways in the nineteenth century. From the 1980s, the new telecoms and cable companies were allowed to build limited, incompatible, systems – the situation was more like the early history of telephone or postal services. Back then, first in post and then in telephones, the state had to step in to ensure the whole country got access and at the same price; principles of universal access that persist a century or more later.

When Britain got wired the first time there was no easy way of separating the physical infrastructure of wires, switches and exchanges from their use – so we had to have a nationalised system of provision and use. Now we have excellent technical and business models of providing market, social networking, public information and other services over physical networks – the internet. We can easily separate provision of a national information ‘grid’ from its use – combining the best of state and private ownership.

For about £15bn–£20bn, BT could wire the whole of the country with optical-fibre cables into every home, school, hospital and business, bringing huge commercial, social, educational and democratic benefits. But the network itself would need to be socially funded and owned, so the government would have to set aside its prejudice against the ‘n’ word – nationalisation. Maybe we should make it a ‘public interest company’ if that will make ministers feel better. Given what we have spent on propping up and nationalising banks, this is small beer.

For a very similar sum – about £15bn–£20bn – we could put in place a high-speed rail network between the major conurbations. Network Rail is already a public interest company so all that is needed is a decision to spend the money. As someone who travels regularly in Europe and Japan it is a constant source of embarrassment that we have such an antiquated railway system. Both the Conservatives and now, surprisingly, Lord Adonis, the transport minister – in last month’s Prospect magazine – have backed such an idea. Most recently Adonis has revealed that the government is thinking about the possibility of combining a new 200 mph rail network with a third runway at Heathrow, by linking it directly to the latter. The Conservatives and the Liberal Democrats want such a network instead of the third runway. In these green, and Keynesian, times a commitment to high-speed rail is just the sort of infrastructure project that ought to figure high on the agenda.

This government has repeatedly claimed that it is investing ‘historically’ high levels in the public sector. In reality, its average net investment has been only about 1.3% of GDP less than the 40-year average of over 2%, and considerably less than the 1970s average of 4.5%.

If we did return to genuinely ‘historically’ high levels of public sector investment, the sorts of initiatives suggested above would be easily affordable. Currently, most public investment goes into useful things such as school and hospital buildings, but these have limited long-term economic benefit. A national information grid and a high-speed rail network would produce significant long-term benefits.

Finally, it is now becoming increasingly clear that our model of public administration needs serious attention. The essentially nineteenth century Whitehall model that we are still operating needs a complete overhaul. It cannot now even guarantee decent administration – as the multiple failures to handle even simple administrative tasks have shown all too clearly.

We need to change the balance between Whitehall and town hall; between Parliament and executive branches of government; and between ministerial and official accountability. It is time the civil service became properly accountable.

And last, but by no means least, we need senior civil servants with real-world public service experience – far too many are still ignorant of what the 90% of public services that are outside Whitehall actually do. Compulsory experience in frontline public services ought to be a condition for senior positions in Whitehall. And we need to realise that good old-fashioned bureaucracy, rather than fancy management gimmicks, is still needed to make some services – such as tax collection and benefits payments – work properly.

New Labour were elected in 1997 on the slogan of ‘education, education, education’. One thing the current crisis ought to teach us is that education is not enough – without the infrastructure of a modern information economy and without proper and effective regulation of both the financial sector and the shadow economy, we’ll have a well-educated army of unemployed people. So if we need a slogan for 2009 – it should be: better regulation, better communications and better administration.

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