I have not been able to post for several months because of the nature of the advisory work I was doing in the past few months. But now I am back! And my last post in the autumn predicted the departure from London of some of the big banks, notably HSBC. Now this in today’s Telegraph about HSBC informing privately its biggest shareholders of the likelihood of a move of its HQ to Hong Kong – a big blow for Britain’s coalition government.
Why should the British middle-class instantly reach for their wallets whenever they hear a British politician talk about closing the gap between the rich and the poor? Nick Clegg, the U.K.’s deputy Prime Minister, demonstrated exactly why in London today with his speech on creating a more socially mobile society. The rich quickly morph into the middle class, and so what he really means is closing the gap between the middle-class and the working-class. The real rich, as we all know, will just move overseas, if there is too much redistribution out of their pockets.
Of course, Clegg can’t say that, especially as he is in coalition with the Conservatives, but that is what he means.
I am all for greater social mobility – that is one of the driving reasons I, British-born, embraced the United States – but “wealth” redistribution is not the way to do it, or shouldn’t be the main driving force. Britain has been trying that since the Welfare State was established in the wake of the Second World War and as studies have shown it hasn’t been so successful. The increased redistribution primarily from the middle-class to the working-class and tremendous subsidies to geographically poorer areas of the UK under the Brown government failed dramatically to close the gaps dividing north from south or the one separating the middle-class from the working-class.
The review the Coalition government is undertaking now of the universal benefits system is a good thing – the well off surely should not be receiving subsidies in the form of child credits and heating allowances they don’t need. But how much is going to get taken from the middle-class at the same time as they are facing higher taxes before they decide either that they have had enough of the Coalition government or decide to trigger a 1970s-style brain drain?
Social mobility comes with providing fine schools, access to excellent higher education and the economic, commercial and regulatory circumstances that encourage entrepreneurialism, wealth creation and prosperity. And as history has shown, countries that declare war on their middle-class tend not to do so well when it comes to economic growth.
Arguably, Margaret Thatcher did more than Brown or Blair for social mobility and encouraging working-class aspirations. She did it by allowing council houses to be bought by their occupants at below market value – a policy fought tooth-and-nail by the left and center-left in British politics. She did it by welcoming success, encouraging entrepreneurism, keeping taxes low, reducing public expenditure and ceasing the British industrial habit of propping up lamb-ducks. She was also more heavy-handed with high-blown, snooty and traditional institutions than many Labour ministers were before her and have been since. And aspiring working-class voters loved her for it – that’s why she was re-elected.
Obviously, it was good to hear Clegg saying that the Coalition government aims to assist social mobility by improving people’s lives rather than by providing hand-outs, but sadly missing from the Clegg speech was anything about lower taxes — just more stuff about “fairer taxes”, in short more taxes on the middle class.
And this on the day when an excellent economist, Danny Blanchflower, a former member of the Bank of England’s monetary policy committee, urged the Coalition government to cut taxes or face another recession.
If you took the U.K. Business Secretary Vince Cable at face value in his interview carried in yesterday’s Sunday Telegraph, you would think that he is unaware that Britain already has a graduated or “progressive” tax system where the wealthier pay a larger percentage of their earnings to the government than those less well off.
Take this remark from Cable yesterday in an interview full of his mantra about “fair taxes”: “What we are trying to inject into the argument is that if you become a very highly paid investment banker you finish up paying more than if you’ve gone off and become a voluntary worker or become a physicist in the National Physical Laboratory, or whatever. I want to make it progressive in that sense.”
The “it” in question is Cable’s graduate tax proposal that now seems worryingly to have secured some support from the Coalition’s David Willetts, the Universities Minister, who is now saying that more university finance should be met by graduates “after they are in well-paid jobs”.
Recommendations for how to cope with Britain’s universities funding crisis will soon be forthcoming from a review headed by Lord Browne. Despite disapproval from many Conservative MPs, the independent review into university finance was asked by the government to include Cable’ graduate tax idea in the mix of solutions to be considered. The review reports in the autumn.
What is strange when reading or listening to Cable explaining his graduate tax is that he seems less interested in finding a solution to Britain’s university funding crisis and more interested in using the opportunity it presents to increase taxes. The graduate tax is motivated by his wealth redistribution obsession – taxes, as far as he is concerned, are just not high enough.
In the interview, he avoids saying that directly but then how are we meant to interpret his position differently? When asked what he would consider success after five years as Business Secretary he responds: “a tax system that means people at the bottom end of the scale pay less and at the top end of the scale pay more.” Again, Britain already has such a system and will continue to have one with or without the graduate tax. The only conclusion is that Cable wants even higher taxes on the middle-class and the wealthy. So how high should they go?
The top rate of U.K. income tax stands at 50 percent. Impose a graduate tax of, say, 5 percent and will that be enough to satisfy the Coalition’s Business Secretary? Will that be enough redistribution? And how many Britons will emigrate as taxes rise?
What adds to the shock of the Sunday Telegraph interview is how uninterested Cable is with his ministerial portfolio as Business Secretary. Success in the post for him is to increase taxes – not to improve Britain’s corporate competitiveness, not research and development, not commercial or product innovation, not productivity and not even – at least in this interview – corporate governance. There is no discussion of industrial policy and what the right balance is between government intervention and the free market or whether government should avoid trying to pick winners and losers or instead focus on creating the right environment and circumstances for enterprise and the free market to flourish.
No, as far as this Business Secretary is concerned success will be determined by having imposed even higher taxes. One can only assume that Prime Minister David Cameron is prepared to let Cable talk as though he’s the Chancellor the Exchequer and Universities Minister and Business Secretary all rolled into one because to do otherwise will prompt a breach and a row in the Coalition government.
On some many levels, the graduate tax is a bad idea – as are higher taxes in general. On the fairness scale the tax doesn’t pass the smell test, as a study released today by the University and College Union shows. Yes, a graduate who went on to be a highly-paid investment banker would pay a ton of cash over his working lifetime for his degree but so would those lower down the income scale. A nurse, for example, could end up paying three or four times the actual cost of tuition fees and a doctor seven times. How is that equitable? The burden on the nurse, for example, is going to be heavy and much harder to cope with than the burden faced by the investment banker.
The graduate tax would have the inevitable consequence of encouraging a brain drain on the scale of what hit Britain in the 1970s and young Britons would have greater options and ease now of moving overseas and securing jobs because of their work rights in the European Union and because Asia and the developing World is competitively keen to secure talent and skills.
And those British graduates who did so and remained abroad would in effect get their higher education for free – they would never pay the graduate tax.
Second, the universities sector is now global and big business. As the Economist pointed out this week, the number of students enrolled outside their home country has trebled since 1980. America is the World leader in this global higher education market with Britain in second place. But that could change and the U.K. could lose its place easily because of increased and aggressive competition. There are now many continental universities that teach wholly or partly in English, American universities – and British ones – are opening more campuses overseas, in Europe, the Gulf and Asia.
The government not only has to ensure that British universities remain excellent and well funded in order to attract foreign students (who represent a revenue stream) but it will need in future to do everything it can encourage Britons to stay and study in the U.K. because increasingly they will have easier opportunities and maybe cheaper ones, if the proposed graduate tax is taken into account, to study for their first degrees, let alone their graduate ones, abroad.
That will certainly be the case for British students from wealthy or affluent families but the market is changing so fast that there will be a global education loans market developing quickly and available for students to tap into and free themselves from the constraints and restrictions imposed by individual countries and governments.
This is something that doesn’t seem to have occurred to Cable and others in the Coalition government. The brain drain could start involving Britons who have not even graduated yet. Britain is only an island when it comes to geography.
In the brave New One World we live in, education and the retaining of the best and brightest is going to determine the winners and losers when it comes to national economies. Instead of obsessing about wealth redistribution, the Coalition’s Business Secretary should be thinking along these lines and worrying about how to keep Britain competitive.