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Revolting times and peer pressure

February 10th, 2011 Posted in Liberal Democrats by

Two factions of the Liberal Democrats have made the headlines in the last 24 hours disagreeing with different aspects of Coalition policy.

The first, headed by Richard Kemp is an alliance of Council Leaders who have decided to enrich the Murdoch pay wall by writing a grumpy letter to the Times. The gist of the letter is that the local government spending is being cut too fast and should be slowed down.

“This front-loading means councils do not have the lead-in time necessary to re-engineer services on a lower-cost base and ease staff cuts without forced, expensive redundancies.”

Most UK companies in 2008/09 were forced by the recession to make rapid redundancies and seek efficiency savings. Some did it quickly, some chose to phase restructuring programmes over several months or a year. Most are now emerging from the recession, essential services intact.

Councils whose £100m+ budgets make them like large businesses are not going to enjoy this pain, but there is no reason to believe delaying decisions will make for better decisions. Long consultation processes, usually involving expensive external consultants, are no substitute for effective leadership focusing the Council’s activities on things that really matter, and staff that really deliver. 

Meanwhile the redundancy point is simply wrong. Delayed redundancies mean more expensive settlements from accrued wages and benefits and cause huge morale problems for everyone at risk or not. Those under-performing or in the least essential roles can’t move (they lose the likely pay-off), and have little incentive to fight for jobs unlikely to be saved. Those working with them, particularly high performers, get frustrated waiting to get on with the changes.

The second revolt was that of unofficial Treasury spokesperson Lord Oakeshott, a former Labour Councillor and property fund manager who has long-standing and strongly held views on reform of the banking sector.

His principle concerns with ‘project Merlin‘, the government/bank sector deal, appear to be ‘net lending’ targets, bonuses, and transparency. These are underwritten by a general concern about how the deal will be perceived by the public. Something his outburst has influenced in a negative way, distracting attention from the large increase in funds targeting loans for SMEs.

Net lending targets, specifically whether or not loans to small and medium sized businesses will increase is not an issue on which either the banks or governments can win over public opinion. Lending expectations were set by the pre-2008 cheap credit boom. The credit was cheap becasue it was mispriced. That in turn undermined the banks most exposed to the worst risks.

If the banks return to those practices, another default is assured. The ‘right’ level of credit then will be lower than pre-crash demand. However neither politicians, nor the banks, can plan where that level should be. It’s a price, supply and demand issue based on thousands of transactions in an ever shifting equilibrium that responds to external events like rising commodity and property prices, currency fluctuations, and innovation. I.e. it’s a market.

So I’m quite unclear what target would satisfy Lord Oakeshott, the marginal businesses that shouldn’t have been given loans in the boom, and the good businesses unused to paying rates more in line with risk. Nor what impact that would have on recapitalisation.

Bonuses are also a no-win situation. The government could ban all bonuses in those banks under public ownership. In doing so they would breach employment contracts and lose the staff they most need in order to sell on the banks in future. Any bonuses above zero will meet with public disapproval. There is no ‘right’ level, and these are operational decisions best left to the banks. By suggesting politicians should get involved in pay negotiations, Ministers have exposed themselves to blame.

Disclosure is an interesting point. There is already much disclosure by public companies. We can see for example from Lord Oakeshott’s own company OLIM that his main Value and Income Trust vehicle increased their investments in UK financial institutions (mainly HSBC)  from 9.2% to 11.2% between 2009-10, receive property rents from Lloyds Bank, Abbey National, and Clydesdale, and that he didn’t get paid a performance bonus due to the fund doing worse than the FTSE All-share index.  With that information you may decide whether or not you wish to invest in VIT.

A prize of our entirely inexpert advice is on offer is you can discern from the VIT report or OLIM website exactly how much Lord Oakeshott is rewarded in total for all his fiscal wizardry. Good policy is best led by example I think.

The banking debate though tends to be in respect of special disclosure for the high pay of individuals who are not Directors. Some recommend publishing lists of the number of people (unnamed) in certain high income bands (e.g. “£0.5-1m).

This is all political. It wouldn’t make any difference to pay levels, only to the cost of reporting them. It’s not clear why bankers, and not media executives, footballers, or other star performers. High pay in all these areas tends to reflect the left ideal of worker power and liberal one of meritocracy, not the conservative preference for secrecy.

Lord Oakeshott and various Council groups I’m sure will continue to attack policy from the sidelines. But they could first assist the national debate by issuing a clear set of alternative proposals. We get winks and nods from these media discloures and the sense of frustration, but largely all the public get is a sense of division.

Neither revolt leaves us with the impression that liberal dissenters from the Coalition have a structured Plan B, let alone a good one.

13 Responses to “Revolting times and peer pressure”

  1. Andrew Tennant Says:

    An interesting article with which I, by and large, agree.

    With regards bonuses, it is surely sensible that the government has insisted on the bulk of bonuses being paid in shares? If individuals with a shareholding that they hope to turn into cash at a later date leave the state controlled banks, having a negative effect on their profitability, they will share in this reduced value through their bonuses being worth less; conversely, should they increase their banks profitability, increase the share value, then they themselves stand to benefit from their skill and hard work.

  2. Andy Mayer Says:

    A good point.

  3. Matt Says:

    And DO watch out for Labour councils who are cutting libraries, getting rid of services for the elderly, etc., not to save money but to make the filty Tories and their evil Lib Dem chums look bad.

  4. Stephen W Says:

    Good article. Here, here. etc, etc.

  5. Dan Falchikov Says:

    Interesting points andy – but very much swimming against the tide. My problem is that these events help to bolster Labour’s fatuous case of ‘too far, too fast’ and the party really needs to get a grip on its media function – otherwise Labour will get away with it.

    More here:

  6. Angela Harbutt Says:

    Let us not forget that councils across the UK hold in total some £10billion in reserves, with 50 of them holding over £50million a piece. A number of councils hold more in reserve than the actually spend in any given year.

    I note, for example, that Lib Dem Cllr Alan Sherwell signed the Times letter – yet Aylesbury Vale holds some £34million in reserve whilst only spending some £27million per annum. No problems with holding money for a rainy day – but how rainy does it have to get before they dip into it? And its quite Ok if they don’t want to dip into it – and to cut costs instead – but to then complain about the cuts seems a tad rich.

    And you have to look at the spending of some of these so-called hard up councils.. Cllr Tom Smith-Hughes from Essex CC also signed the The Times letter. Essex has over 20 council staff on over £100k.Shouldnt he be spending his time looking at that?

    Cllr Kathy Pollard also signed the Times letter yet Suffolk County Council is a positive joke. when a resident recently put up a petition on the Council’s website to reduce the county council chief executive’s pay (an eye-watering £220,000 per annum), the petion was withdrawn from the website by the Council after one day. The Chief Executive in question was recently berated when she launched a £400,000 staff training programme, involving techniques used by hypnotist Paul McKenna!! Couldn’t Cllr Pollard spend more time working to control the excesses in her area before joining the whinge-fest?

    I have many more such examples … Cllr David Faulkner…Newcastle City Council with some 29 staff on £100k+…Cllr Paul Morse…Norfolk County Council with a CEO on over £220,000…etc etc

    But right now I need to go lie down in a dark room.

  7. John Stevens Says:

    I agree. Good piece. But who is spelling out the delicate balances involved in all this politically? The Government’s lack of conviction in explaining itself is becoming a real problem.

  8. Liberal Neil Says:

    The point about redundancies is not that you save money by delaying a compulsory redundancy but that having a bit more time makes it much easier to reduce the number of compulsory redundancies trough a process of encouraging early retirments, redeployment, negotiated voluntary redundancy etc, all of which tend to be a lot cheaper.

    Similar factors apply to other long term savings. For example my local (Lib Dem) district council and the neighbouring (Conservative) district council will this coming year each save £350K because they are now running a joint waste contract. This took three years to happen because of different end dates to the two council’s previous waste contracts. If, three years ago, they had been told they had to do it within one year, it would not have been possible.

    @Angela It is generally a good things that councils hold reserves. Much of them will be ‘earmarked’, such as S106 monies which are going to be spent on specific agreed projects, and much of the reserves will be providing investment income, reducing the level of their Council Tax. Odd that councils should be penalised for being responsible with their cash!

  9. Angela Harbutt Says:

    Liberal Neil – I agreee that holding reserves are a good thing – and no – all things being equal – they should not be penalised for being responsible with their cash – just as I should not be penalised for the Labour party squandering so much and not having any reserves when hard tims hit…

    but we are where we are – so if we spend more on councils we spend less somewhere else. Expecting councils to dip into the reserves to “manage spending reduction in a more cost effcicent way” say …spread over 2 years seems like a realistic ask.

    (Am Not sure just how much investment income councils are earning off their reserves right now.. not a lot i’ll be bound.)

    I also wonder why it takes the action of withdrawing funds for councils to look seriously as such ventures as “running a joint waste company”. Why weren’t they doing that already ? BEcause councils have been really rather good at spending money and not terribly incentivised in saving it – up until now.

  10. Psi Says:

    @ Liberal Neil

    A slightly tangential point but if a council only starts looking to cut costs with things like negotiating a contract with a neighbouring council when the cuts have really started to bite you have to ask what were they expecting? Is it ok to waste council tax payers money in good times because there appears to be plenty of cash sloshing about?

    The crisis starter to show signs in 2007 Bear Stearns and Lehman failed in 2008. Northern Rock was nationalised in 2008. HBOS effectively failed in January 2009 and was foisted on Lloyds and the Government bailed out Lloyds and RBS at a similar time.

    Which idiot councillors thought “wow there will be lots of money to spend in the future, as taking on the liabilities of some of the world’s biggest institutions will not cause a drain on central funding.” If they couldn’t see that councils would have funding cut as the world economy teetered on the brink of collapse then they should be embarrassed to appear in public.

    I can understand in 2005 a councillor who is worrying about bin collections not understanding the economy is in serious danger (as the BBC was repeating the Labour party line that the new golden age was upon us), but as the high street banks start to fail there is no excuse for not thinking that trouble was on the horizon. Or perhaps it was because there was an election in 2010 so they were not willing to be honest and start planning for the coming shortfall, either way I feel no sympathy for these people.

  11. Liberal Neil Says:

    @Angela Councils may not be deriving a massive income in interest on their reserves now, but if they get rid of them now then they won’t have them when returns start to go up again.

    @Angela & @Psi Councils have been reducing costs steadily for several years now, during the period when central government was spending more and more. But as Angela says ‘we are where we are’, and my concern is that from where we are, the Government should act in a way that helps councils achieve effective long term savings. I don’t disagree that councils will have to do their share of reducing spending. The question is why the Government expects councils to be able to cut spending more and more quickly than it believes it can.

    @Psi For me it’s not about whether I have sympathy for any particualr people, but about effective ways to reduce long term costs.

  12. Sarah S Says:

    hello!, First time poster and looking forward to being a part of the discussion!

  13. Says: