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A significant part of the UK economy is now controlled by private equity players, who determine the futures of one in five private sector employees. Despite that, and the investment of company and private retirement funds in this sphere, the industry is
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The goals of the longer-term investor are not for them. Objectives such as improvements in production or services, consumer needs, new product lines and increased productive capacity are not at the forefront of the minds of hedge fund managers. Even though the objective is to gain control of companies, the managers of hedge funds do not then see themselves as employers, committed to invest in and develop both the company and the relationship with the staff. They want, and all too often achieve, a commitment that is without obligation, and one in which there are no barriers to taking whatever action they intend in the quest for a quick and significant financial return. In theory, they are hedging risk, but they are also speculating, and economic stability, long-standing firms and industries, and jobs are the pawns on their chessboard.
A short-term approach also impacts on future generations. If the capital markets seem to be moving more towards the short-term investment approach that is geared to a rapid financial return, where does that leave us in the future over the funding of research and development and innovation, which requires a very different approach? Climate change and renewable energy are issues that have moved rapidly up the scale, and much-needed investment in environmental technology is unlikely to interest those seeking quick financial returns.
The changes in the way that financial markets work have been a factor in the dramatic increases in remuneration in the sector, particularly in London. It has been reported that at least 3,000 people received bonuses of £1 million or more for last year. That was not a unique occurrence; it has happened in previous years and is likely to happen again in the next few months, with predictions of 4,200 people receiving bonuses of £1 million or more, with bonuses in the City totalling £8.8 billion. The situation is similar at the highest level in Britain’s largest companies. Over the past 12-month period, boardroom earnings rose by 28 per cent, seven times faster than average earnings and nearly twice the increase in the FTSE 100 index. That was not a one-off, since the latest figures simply repeat rises of 16 per cent, 13 per cent and 23 per cent over the previous three years.
The argument advanced is that such increases reflect achievement, but it falls down when it becomes clear that, leaving aside their size, the increases are too often not related to the performance of a company. The other argument is that repeated increases of such magnitude are needed to remain competitive. That is a very convenient argument but
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A great many others in the world of business and commerce, technology, manufacturing and engineering, research and development and public service achieve and bring great benefit to the community and the economy, just like those in the financial markets—but they do not receive or expect increased remuneration packages that are way in excess of everyone else in return for delivering and remaining in their posts. The overwhelming majority of companies and organisations will seek to ensure that work brings a fair, but not excessive, reward and, for some, that approach will mean high rewards. The evidence though is that in recent years that approach is being interpreted rather differently in some boardrooms and in certain parts of the financial markets than it is everywhere else.
There is now a rapidly widening gap between those receiving the highest incomes and both those at the bottom end of the income pile and those on average earnings. With the changed priorities in some parts of the financial markets, and the implications for company stability and development, for jobs, and for the longer-term commitment to a firm of those who own it, these are developments that do not assist in achieving a fairer and more socially cohesive society, which ought to be as much a goal of any Government as economic growth and prosperity.
7.48 pm
Lord Whitty: My Lords, I start by welcoming my noble friend Lord Truscott to the Front Bench. I first knew him when he was an agent for the Labour Party, but he got over that and moved on to greater glory in the European Parliament and now, I am sure, on the Front Bench here. He is very welcome. I couple that by joining the tributes to my noble friend Lord Sainsbury, who not only was my roommate for many years but has made a great contribution to science and to the proceedings of this House.
I intend to touch on three interrelated aspects of the economy and economic policy, all of which a few years ago probably would not have been regarded as mainstream, but which I now regard as mainstream. Climate change and the economics of climate change have been touched on by a number of noble Lords; the other two less so. Inequality is one of my other themes. My noble friends Lord Rosser and Lord Peston have latterly touched on that theme.
The third is the interest of consumers in that process. On the latter, I declare an interest as chair of the National Consumer Council, and I probably should on the climate change issue as a member of the board of the Environment Agency and the London Climate Change Agency.
Three Bills directly relate to consumer matters. We will debate the Consumers, Estate Agents and Redress Bill only next Monday, so I shall curtail my remarks on it, but I need to say that I very much welcome its broad thrust in its objectives of creating a single, cross-sectoral advocacy and policy body for consumer interests; improving the ombudsman function, particularly in the energy sector; and enhancing and
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Also on the consumer front, we have the Legal Services Bill. I very much welcome it, partly because it was originally suggested by the National Consumer Council some years ago, well before my time. I hope that lawyers in this House and elsewhere back off from their initial great hostility to the Bill and recognise that legal services, like all others, have to take account of the consumer, client and customer interest.
I also have an interest in the digital switchover Bill. I listened with interest to noble Lords discussing that, including my noble friend Lord Currie. It is important that, in the process of digital switchover, the interests of the more vulnerable consumers are recognised; I was glad that he referred to that. I particularly draw his attention, and that of the House and the Minister, to the position of people in council and other multi-occupied housing, for whom there is the possibility of paying a much higher cost for digital switchover than in areas where individual households make the choice. That needs to be covered by the Government, the regulator and the BBC’s approach to supporting vulnerable households.
On climate change, we have had some differing views, and it is with great temerity that I have to say that I disagree with three of my most distinguished noble friends, two of whom have just disappeared, but I hope that they will be back in a moment. Here is one of them. Many years ago, one of them—he has probably forgotten—attempted to teach me economics, and the other two have taught me a lot about politics. It is important that we recognise that the Stern report finally gives us a robust analysis of the economics of climate change, although there are obviously wide ranges of probabilities involved in it, as there are in the science. I have been long convinced of the science of climate change but, on the Front Bench and since, I always felt slightly nervous that its economics had not been fully explored. The Stern report fills a major gap with that. One of Stern’s major recommendations is, in effect, on the cost-effectiveness of measures to not only mitigate climate change but, as my noble friend Lord Peston emphasised, adapt to inevitable climate change. The sooner we make decisions on that, the more economically sensible and rational it is.
That means huge responsibilities on government, nationally and internationally, and on industry, but there is also a consumer dimension to the subject. One of the NCC’s responsibilities is to promote sustainable consumption, which is a difficult task. A proportion of consumers are of course very aware of climate change and other green-related issues, and make choices based on those values. We need to enable them more easily to make those choices, in terms of labelling, education and presentation of the various products that face them. They are, I hope, a growing minority of consumers, but they are
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That will continue to be the case, but government and industry can affect the framework in which that choice is made. In relation to quality, I go back to some remarks by my noble friend Lord Haskel. Industry and government ought to deploy the creative design facility of this country—we have leadership in the area—to ensure that the products and services we offer maximise the take-up of the greener options. On availability, there is a significant role for regulation in setting standards and requiring labelling, and in banning some high energy-use or resource-use products. On price, there is a major role in relation to taxation. That is a difficult area as there is often regulation, and presentation is difficult. It appears that the consensus among the political parties, at least in principle, is that there should be some shift towards green taxation. I approve; it should be done, broadly speaking, on a revenue-neutral basis. In other words, you tax the bads and incentivise the goods in terms of energy content or other green measures.
We have to recognise, however, that there is another problem about the switch to green taxation—that, in some forms, it could disproportionately affect the lower-income groups. Even if operated on a revenue-neutral basis, green taxation, like all indirect taxation, can disproportionately affect the poor, and can be in some forms extremely aggressive. A concomitant of going for more green taxes as a proportion of the tax burden must therefore be that the rest of the tax system is put on a more progressive basis. That particularly applies to the structure of and threshold for income tax, and to council tax. If we have a more progressive system of that form of direct taxation, we can accommodate a shift to green taxation to deliver our environmental objectives in a way that does not penalise the weakest elements of our society.
That also touches on my final theme, equality. By equality, I make no apology for saying I do not just mean equality of opportunity; I mean equality of outcome. On both, the progress has been sadly lacking in the past two decades. Inequality in our society has grown over the past 25 years. After the war and for some time afterwards, the UK was one of the most equal societies in western Europe; it is now one of the least. That is true not only in the static sense of the immediate snapshot, but in social mobility, where we have gone backwards. The Government have engaged in major efforts to reverse or hold that trend. The tax credits system, the minimum wage, interventions such as the New Deal and other provisions of benefit into work have all attempted to do that, but the net effect is that we have, broadly speaking, frozen the distribution of income at roughly the levels we inherited. There has been a slight improvement here and there, but in general that is the picture.
The distribution of wealth has actually deteriorated in terms of equality over the past few years. Although pensioners, the poorest families and some people for whom the minimum wage is properly
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At the other end of the scale, there is the situation pointed out by my noble friend Lord Rosser—that there are obscene increases in income in elements of the City and some of the boardrooms of our country. That is not justifiable on economic or social terms, and is extremely dangerous to our social cohesion. Frankly, it cannot be justified in terms of competitiveness and globalisation. I do not go along with the noble Lord, Lord Beaumont, or Nicolas Sarkozy in opposing globalisation; free trade brings many benefits. When I was taught economics—probably not by the noble Lord, Lord Peston, in this case—free trade and trade depended on a comparative advantage and an absolute advantage, certainly not an absolute advantage enforced by exploitative wage rates.
Globalisation has many benefits and does not mean that we on the one hand should move towards Chinese wage levels for fruit pickers, cleaners and textile workers while we have Texan levels of remuneration in our boardrooms and among our City brokers. I would submit that that outcome of economic policy would seriously threaten the social cohesion of this country and cannot be justified in any economic policy terms.
8 pm
Lord Oakeshott of Seagrove Bay: My Lords, I declare my interest as a pension fund investment manager for the past 30 years, but before the noble Lords, Lord Rosser and Lord Whitty, draw in their breath, perhaps I may say that I agree with almost every word that they have said.
I have to declare another interest; I am afraid that I am a long-standing, over-enthusiastic consumer of Cobra beer. I was most impressed by the splendid maiden speech made by the noble Lord, Lord Bilimoria. If he has a bottle of Cobra on his coat of arms, may it always be full. We heard also a very moving maiden speech by the noble Lord, Lord Rowe-Beddoe, on the problems of manufacturing employment, particularly in Wales, and I look forward to hearing much more from him.
My noble friends Lord Newby and Lord Vallance combined their usual expertise and great good sense in their speeches on the Stern review. Perhaps I may tell the noble Lord, Lord Peston, that I had not realised he was such a cynic. I was particularly struck by the scepticism of the noble Lord, Lord Vallance, regarding defence research spending. I share that in spades. My noble friend Lord Lee spoke on tourism. I thought that my noble friend Lord Dykes was initially
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In replying to this debate, I wish to focus on the dangers of three types of debt—private, corporate and public. Debt in Britain is a monster gnawing away at the security and future of far too many lower-income and middle-income families, and threatens a whole generation of young people. For them, high house prices are a curse. If they are less educated and less skilled, the collapse of council house building under successive Governments and the shortage of affordable homes to rent can plunge them deep into debt, even in northern Britain, when they have to buy a house of their own. In southern England, lower-paid young people now see the housing ladder pulled high above their heads.
Many of the brightest and best-educated young people coming out of university into well paid jobs also risk drowning in debt. Starting £15,000 or £20,000 under water from student loans and top-up fees as soon as they graduate, they will gasp for breath a few years later when they take on their 100 per cent, interest-only mortgage, as the noble Lord, Lord Sheldon, highlighted, to buy a basement flat or a tiny terraced house if they work in the south-east or other high-priced property areas. No wonder the personal finance editor of the Times calls herself “young, gifted and broke”. And no wonder that a whole generation of young people are starting work with no realistic prospect of saving for a pension until it is too late to build the pot that they will need for a reasonably comfortable old age. Some 20 or 30 years ago, many young people saved without thinking for a pension when most large private-sector employers offered a defined benefit pension scheme. Now that happens only in the public sector.
Crippling personal debt is a problem so far only for a minority of households. The November inflation report from the Bank of England shows how household debt has doubled since 1999 and is now equivalent to one and a half times the post-tax income of households. About one in six households in that survey said that they faced problems repaying debts, and about 0.2 per cent of the population became insolvent over the past year. That sounds a reassuringly small statistic, does it not? However, it represents more than 100,000 men, women, and children in families who have fallen off the financial cliff. For them it is 100 per cent, not 0.2 per cent, disastrous. And how many more families are peering over the edge?
The chief executive of Debt Free Direct says there are now 2 million “irreversibly indebted families”. They may be able to pay their monthly interest bills, but have no realistic prospect of ever paying back the loan, short of a lottery win. And he should know—debt is a booming business in Brown's Britain. The Association of British Insurers last week published its annual survey of how British people
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The Bank of England inflation report also shows how the effective interest rate on household loans, mainly mortgages, was over 2 per cent above base rate in 1999, but today is only just over 1 per cent above base rate, so the interest rate margin has halved. Paying the interest on your mortgage is now easier, but paying back the capital is a real struggle. Perhaps I may tell the noble Lord, Lord Peston, that my scars of advising Government may go back only to the 1970s, but I certainly remember when inflation was 25 per cent. High inflation did at least wipe out a big chunk of your mortgage in real terms over the years, but now you have nowhere to hide if you borrow too much.
These frightening figures on families in debt come after 10 years of high employment, falling interest rates and steady economic growth. That has created a balmy climate for borrowers—I disagree with the noble Baroness, Lady Noakes—for which the Chancellor can claim some credit, as he always does. There is one golden rule that he never takes the slightest risk of breaking: the politician’s golden rule—“If you don't blow your own trumpet, no one else will do it for you”. He may prove me wrong in his Pre-Budget Report, but I would not count on it.
Seriously, though, the economic cycle has not been abolished and the British economy will go through tough times. Far too many of our fellow citizens are already on a debt knife edge with no margin of safety as unemployment and house repossessions creep up. We on these Benches call for a massive expansion of integrated debt and pensions advice centres, building on and working alongside the National Association of Citizens Advice Bureaux. Only a one-stop shop with a trusted brand name can reach millions who need help. Otherwise, there is a real risk that the national pensions savings scheme will involve serious pensions mis-selling. Auto-enrolment in pensions, combined with a means-tested state pension for many years to come, could easily be a toxic cocktail.
Turning to the points powerfully made by the noble Lord, Lord Rosser, we may also be storing up a potential debt problem in the corporate sector with the explosion of private equity funds. Richard Lambert of the CBI is right to warn about the risky financial structures of private equity-backed companies and the public policy questions for an economy, as he put it, where large swathes are held in these high-debt structures. The British Venture Capital Association today launched a campaign to protect those companies’ favourable tax status. Its Government lobbying operation is pretty slick and it enjoys a powerful voice in the Chancellor’s ear in Sir Ronald Cohen, who built Apax Partners into a $20 billion private equity group.
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But today’s multi-million pound buyout funds are more about fancy financial engineering, not real venture capital, as the noble Lord, Lord Wade of Chorlton, described in his fascinating speech, which backs start-up and early-stage entrepreneurs and small companies. Sir Ronald’s firm, Apax Partners, helped by the Economist Intelligence Unit, produced a report, Unlocking global value, which points out,
“Most major buyout firms have little or no involvement in pure venture capital, where there is less money and higher risk”.
That is their business decision, but shuffling the ownership pack of mature companies has none of the economic or social benefits of successful early-stage venture capital.
This year has seen a flood of private equity bids for water companies and other privatised utilities. How does our economy benefit? Where is the value added for Britain when a secretive buyout fund bids billions for a publicly quoted British water company and loads it up to the eyeballs with debt so that it pays no corporation tax to the UK Exchequer? The Apax report also shows how buyout deals are getting riskier and more highly geared: in 2005, buyout firms borrowed, on average, five and a half times the target company's earnings before interest, tax, depreciation and amortisation, against only four and a half times in 2004. So, if British pension funds invest in this buyout vehicle, they are just paying higher fees to the Goldman Sachses or Apaxes of this world to invest in the same underlying water company assets that the pension funds previously owned anyway in their quoted share portfolios. No pension funds would publicly borrow several times their stake to invest in the equity market, but that is what they are doing indirectly through these big buyout funds.
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