Category Archives: Economy

BP Jobs Cut is a Wake Up Call for Independence Supporters

Today’s announcement by BP that they will be cutting jobs in North East Scotland as a result of falling oil prices is a real blow for the local economy.

The news is a wake up call to supporters of independence who based their economic plans on Oil.

Oil prices are out of the hands of the Scottish and UK governments and is far too unstable to rely on for a major part of a country’s economy.

Falling oil prices are seen as a net positive for the overall UK economy that can weather the impact. It is however a massive blow for North East Scotland that the SNP Government has underfunded for many years. It puts a massive hole in the SNP’s plans for independence and shows that Scottish voters were right to reject their inflated promises.

North East Scotland needs to transition quickly to renewable energy where with on shore and off shore wind we have substantial resources and the price is far more stable and predictable. Oil and Gas will be a major per of the local economy for years to come but this news shows that the future is renewables and that we should invest now before we are forced to by shrinking oil reserves and volatile prices.

Scottish Government Underspend a body blow for Angus investment

Angus Liberal Democrats have reacted angrily to news that the SNP Government has left £444 million unspent last year, despite closing key services across Angus and failing to invest in local infrastructure.

Accounts have emerged showing that the Scottish Government has underspent:

  • £92 million on Justice
  • £10 million on the Procurator Fiscal Service
  • £102 million on Infrastructure
  • A whopping £165 million on Education
Sanjay Samani and Cllr David May visit the Closed Police Counter in Montrose

Sanjay Samani and Cllr David May visit the Closed Police Counter in Montrose

Lib Dem Campaigner for Angus, Sanjay Samani said,

“The SNP have been steadily closing down services in Angus. They have closed Sheriff’s Courts, Police Counters, Noranside Prison and Angus College. They have failed to build a flyover at Laurencekirk that we desperately need to protect drivers. Yet in all these departments there was plenty of money left to be spent.”

“Meanwhile our SNP elected representatives, Mike Weir MP, Nigel Don MSP and Graeme Dey MSP, have done absolutely nothing to stop the closure of key Angus services by their SNP colleagues in Edinburgh. This has cost Angus jobs, made it harder for students to study, left Laurencekirk junction unsafe and had a negative impact on our local economy.”

“The SNP have blamed all the cuts on Angus services on Westminster, and yet they had close to half a billion pounds left to invest.”

Lib Dem Montrose Cllr David May said,

“As an ex-teacher and head master, I am appalled to see £165 million go unspent on Education. The merger of Angus College with Dundee and loss of hundreds of college places has had a huge impact on our young people, just trying to get on in life.”

“In Montrose we have a major issue with parking on double yellow lines that are not being policed due to SNP cuts, that they have blamed on Westminster, despite having £92 million left over.”

“Sanjay and I have backed Jill Fotheringham’s campaign for a flyover at Laurencekirk for many years. The news that on Infrastructure £102 million was left unspent will be a body blow for those desperate to see safety at the junction improved.”

Sanjay Samani concluded,

“We have an SNP MP and two SNP MSPs who have badly failed Angus residents. This year they will blame cuts on Westminster to gain votes at the General Election. Then we will see a big spending spree in the run up to Scottish Elections in 2016 and they will try to claim the credit.”

“The SNP need to stop playing politics and start investing in Angus.”

Living Wage makes more sense than topping up through welfare

The Low Pay Commission’s proposal announced today encouraging the government to pay the living wage to direct employees and encouraging businesses to adopt the living wage is something we can all get behind.

Living wage ‘should go to one million more workers’

I fully suppor this proposal.  I think encouraging companies to pay the living wage is a sensible option, and perhaps could even be encouraged through corporation tax credits.  Concerns over employment were unfounded with the introduction of the minimum wage, and I believe, as the Low Pay Commission does, that these concerns are unfounded for the living wage.

There will inevitably be some companies that the impact on costs will require an increase in prices to remain profitable. Whilst we should be aware of the impact on consumers and inflation, we should consider that we increasingly feel uncomfortable about cheap products being produced by cheap labour in the Far East. We should feel no differently about

Paying a living wage up front makes more sense to me than topping up income through Working Tax Credits, or benefits. There is also a huge psychological benefit of giving workers a sense that they are being valued for the work they do and that they are not dependent on welfare. This is particular the case in an age when Labour and the Tories are hell bent on demonising anyone on welfare, even if they are in work, disabled or elderly.

One issue discussed which is of concerns is whether there will be a ratchet effect to maintain pay differences between pay grades in an organisation. For example, a supervisor will get paid more than one of their staff, but if the staff get a rise to the living wage, the supervisor may not be earning significantly more and there will be a pressure to increase their wages as well. This may then cascade up the management chain.

There needs to be some in depth analysis to understand whether this will be an issue, and the Low Pay Commission seems to have concluded that it will not.

Where I do have a concern is the caveats for some industries, where it is felt that the living wage will have a significant impact on profitability, and hence the recommendation that the Living Wage be advisory, not mandated for private companies. I worry that this will mean that the targetted 1 million to move onto the Living Wage will be the low hanging fruit – those that are earning above the minimum wage, but below the living wage and who will not need much of a rise to bring them on the living wage.

There is a risk that those who are struggling the most on the minimum wage will be left without a rise and a gap develops between them and those on the living wage. Our focus should always be on those that are least well off.

That is why I am delighted that the Lib Dems have delivered those on the minimum wage a £800 tax cut and why we are committed to ensuring that they pay no income tax at all. What is deeply disappointing is the welfare cuts that the Tories have imposed on the least well off who are now bearing a greater share of the burden of recovery than most other groups except the very wealthy.

Vince shows Labour how to deal with Bankers’ Bonuses

Yesterday, Ed Miliband said the chief executive of Royal Bank of Scotland, Stephen Hester should not receive a bonus this year.

If Labour wanted control of executive pay of state owned banks, then they should have made renegotiation of contracts a condition of the bailout when they were in power.

Labour should have also demanded that all front office investment banking staff in those banks had to re-apply for their jobs, without any guaranteed bonuses.

Labour left the coalition toothless to deal with the issue. Once the banks returned to operational profitability, they lost the legal financial justification for placing investment banking front office staff under consultation to review pay and conditions.

Today, Vince Cable has proposed a series of measures to give shareholders a binding vote on executive pay, and crucially, given Sir Fred Goodwin’s deal at RBS, exit packages.

Vince Cable found himself unable to address high pay at RBS, Lloyds and HBOS, thanks to Labour’s failure to address the issue when it bailed out the banks.

Vince has done what Alistair Darling should have done, and proposed the legislation he needs to get the powers the government needs.

As the largest shareholder in RBS and other banks, the government will now be able to control the executive pay at those institutions, and fix the problems Labour created.

 

Robin Hood or Court Jester?

During the 2010 General Election, a campaign got under way in support of a ‘Robin Hood Tax’.  The suggestion seemed to have fizzled away but has been gaining some steam recently.  In particular, the Archbishop of Canterbury has come out in support of the proposal, in the midst of #Occupy movement’s presence at St Paul’s Cathedral.

The proposal on the face of it, has merit, focussing a tax on high risk speculative casino banking that created the Credit Crisis, the worldwide recession and the continuing troubles in the global economy.

However a deeper analysis shows that the Robin Hood Tax (RHT) is actually counter productive when it comes to reforming the banking sector, preventing a similar crisis in future and getting our economy moving again.

Firstly, a disclaimer.  I spent 10 years working in the IT departments of Investment Banks in the City of London, before leaving 7 years ago.  However there is no love lost between myself and the City.  Whilst I have friends from my time working there, particularly those in IT, I have little sympathy for the poor risk management that led to my former colleagues prompting the credit crisis.

What is the Robin Hood Tax?

The Robin Hood Tax is a type of ‘Tobin Tax’ whereby a tax of 0.05% of the transaction value would be levied on all banking transactions, where the financial institution is speculating with its own funds, as opposed to investing customer’s money.

The arguments in favour are that this could raise £250bn globally, and £20bn in the UK alone.  As the tax is only on trades that banks make with their own money, the tax cannot be passed on to their own customers.  Supporters want the tax to donated to charity and to help banks repay the damage they have done to the global economy.

Criticism has focussed on whether it would drive the Financial Services sector away from the UK, a crucial part of our economy and the need for it to be implemented globally to be effective.

The Court Jester

Objectives for Banking Reform

There are some clear objectives that need to be reached by global banking reform, and any proposal needs to be assessed against them. The objectives must be to:

  • Ensure that a similar crisis cannot happen again by reducing high-risk investment
  • Get Banks lending to sound UK businesses to stimulate growth
  • Recoup the money invested in bailing out the banks
  • Protect our savings from the excesses of high risk banking
  • Address the ‘bonus’ culture within the banking sector

Unfortunately, on examination, the Robin Hood Tax is actually counter productive on the first three of these and unhelpful for the other two.

High Risk Banking

Now, 0.05% does not sound like very much, does it?  Until you realise that the profit margins on low risk transactions are between 0.1 – 0.2%, which means that the Robin Hood Tax would be a 25-50% tax on profits.

Sound implausible?  If you look at the RHT website, it claims that the £20bn raised in the UK will be based on taxable income of £90bn, i.e., a 22% tax on profits.  This would be on top of 20% Corporation Tax.

Crucially, the tax is levied whether the bank makes a profit or not.  Given that the amount of tax raised is based on the amounts traded, rather than the profits, this means that in a bad year for banks, they would pay £20bn in tax, even if they were to make a loss

I am not arguing that we should feel sorry for the banks or that a higher level of tax on profits would be unfair or unjustified (although I do object to major taxes on companies that are not in profit).

The important thing to realise is that this will prompt banks to make more high risk investments, not less.

To understand why, we have to understand the recent history of investment banking.  As banking went global, electronic and hugely profitable through the 80’s and 90’s, the large amounts of money being made led to a lot of healthy competition, that in turn led to profit margins on trades being squeezed right down to 0.1% of transaction value.  Banks were still able to make large profits, because the amounts being traded were so huge.  A single £20m trade could still give a profit of £20,000.  The RHT would then take £10,000 of this.

To maintain profit margins, banks invented new investment products, for which they were able to charge a hefty premium.  When first introduced, products like Swaps, Convertible Bonds and Credit Derivatives were able to command profit margins of up to 2%.  However the cycle always repeated and increased competition squeezed profit margins.

This cycle has led to banks inventing more and more exotic products, that were increasingly risky.

And here is the nub of the issue.  Adding a 50% tax on profits on low risk, well understood, well managed banking transactions will simply drive banks to trade higher risk, higher profit margin products, just as increased competition has led them to do over the last 30 years.

Products like Futures, Options, Swaps, Swaptions and Convertible Bonds, were once high risk, poorly understood, high profit transactions.  They are now the staple of Investment Banking and most banks can trade them perfectly safely.

Credit Derivatives and complex securitisation structures are the high risk, high profit exotics that have brought the world economy to a stand still.  And we should not be encouraging banks to trade them until they are better understood and managed.

So the Robin Hood Tax would prompt banks to trade higher risk investments, not lower.

Liquidity and Volatility

Unfortunately here I need to add in some banking jargon.  Liquidity measures how easy it is to buy or sell in the market.  The more buyers and sellers there are, the easier it is to buy or sell something.

Volatility measures whether prices go up and down smoothly and gently, or jump up and down dramatically.

When a product is liquid, and you need to sell to avoid making a loss, then it is easy to do so and the price does not change dramatically.  If a product is not liquid, and there is a major problems, the market will slump quickly, and you cannot sell easily, leading to major losses.

For example, the current UK housing market has very few buyers and sellers.  The result is that no-one really knows how much houses are worth.  You can put your house on the market for what you think is the right price and end up having to sell for a lot less, potentially losing money.  Try to buy in a good school catchment area, and you can find you have to pay through the nose.  The market currently has low liquidity and high volatility.

Simplistically, liquidity is good, volatility is bad. In fact decreasing liquidity increases the riskiness of a product.

The Robin Hood Tax by definition is intended to stop banks trading as much of their own money.  As a result this will make products that are currently reasonably risk free, less liquid, more volatile and in fact more risky.

There is a knock on effect, in that other, non-banking investors will shy away from investments that they cannot sell out of easily, decreasing liquidity further.

Again, the RHT will prompt increased risk, not decreased.

Get Banks Lending and Investing in Business

As well as retail banks directly lending money to small and medium sized businesses, the investment banks also provide crucial credit and capital to larger businesses through buying shares and buying corporate bonds.

These are not always high profit investments by banks and form the more mundane part of an investment bank’s business operations.

Again, an additional 0.05% tax on the buying and selling of shares and corporate bonds will likely mean less investment into British companies.

And again, there is a knock on effect with other financial institutions.  If banks are not buying when companies either go public and sell shares, or when they try to raise money through corporate bonds, then they price per share will drop or the rate of interest for borrowing will increase, due to the lower demand.

An added knock on effect is that venture capital funds are less likely to support start up businesses, unless they are confident that there is a vibrant market for them to go public.

The Robin Hood Tax, by discouraging banks investing with their own money, particularly in low profit investments, will lead to a decrease in investment and lending to businesses.

Getting Our Money Back

The UK Government borrowed eye watering amounts to bail out and buy a number of UK banks to stop them collapsing.  Given the scale of borrowing, the only way to recoup this money is to sell the banks back into private hands.

Unfortunately, the markets are fully aware of this and know that at some point in the future, the Government will be selling large quantities of bank shares.  The markets know exactly what price the UK government paid for the banks, and the shares in banks have continued to trade under that price since 2008.

The share price of any company is directly linked to its profitability.  Taxing an additional 25-50% of profits will lead to a dramatic fall in the share price of the state owned banks.

Which means that the Government will struggle to sell off the banks and get back the money they have invested.

Frustrating as it sounds, we need our retail banks to be healthy and profitable to help get the country’s finances back on track.

So the Robin Hood Tax would make it harder for the UK government to get back the money it has invested in the banks, and at £20bn per year, it will take years to recover that money through the tax, and that is only if none of it is given to charity.

Protecting our Savings

The Robin Hood Tax does not in any way address the need to protect our savings from speculative trading by banks with their own money.  In this case it does nothing to harm it, beyond encouraging riskier trading.

Investment banks have merged with retail banks to take advantage of the large holdings of the retail arm to borrow more heavily and more cheaply for speculative trading.  The key is to split up the investment and retails arms to stop the investment arms ‘leveraging’ our savings for high risk trading.

Bonus Culture

Again, the Robin Hood Tax does nothing to address the bonus culture within banks. At this point, I should state that I have no objection to bonuses linked to profits, preferably long term profits.  However there is a case, I believe, to end guaranteed bonuses, whereby a trader gets paid a substantial amount, irrespective of their trading performance.

In the next two articles, I will address a couple of key questions.  If the Robin Hood Tax does not address our objectives for banking reform, what will?  I will also look at the causes of the banking crisis, other than the banks, which are increasingly ignored by the ever more emotional coverage of the banks.

 

Noranside Staff Deserve to Know Decision Making Process

I was very disappointed to read of the Scottish Prison Service’s decision not to release information relating to Noranside Open Prions under the Freedom of Information Act, on the pretext that, “it would not be in the public interest”.

It is extremely unfair on the staff at the prison for them to be treated in this way. Staff deserve some certainty and clarity from the SNP government about the future of their jobs. They also deserve to know how the decisions around the prison have been reached.

Not only do they have a right to know how the SNP government came to its decision to close the hugely successful prison, but also why they were assured last year that there were no closure plans, and why the decision has now been delayed until after the election.

The SPS must honour its obligations under the Freedom of Information Act and release details of any documents relating to the decision to close Noranside.

Click here for Robert Brown’s response on The Courier website.

 

Sanjay At Noranside Prison