BBC BLOGS - Newsnight: Paul Mason

Archives for July 2010

IDS: Rip up the benefit system and start again

Post categories:

Paul Mason | 19:49 UK time, Thursday, 29 July 2010

Newsnight has seen a leaked copy of the "command paper" to be issued by Ian Duncan Smith tomorrow. Technically a consultation document, the paper "Welfare in the 21st Century" admits that:

"the overly bureaucratic benefits system can act as a barrier to work, trapping people in poverty".

The problem is the rate at which four or five separate benefits are withdrawn as people move off the dole and into work. For 130,000 people, the effect of working more than 16 hours a week is to remove 90p out of every extra pound they earn. For a staggering 1.9 million people the effect is to remove 60p.

The paper explores three solutions, but IDS' clearly preferred option is the so called Universal Credit. This will be spun as "combining elements of the present system" but even the cursory detail in the command paper makes clear this is radical reform.

Housing benefit, income support, council tax benefit, working tax credit and child tax credit would be replaced by one single benefit. This could then "taper off" at a unform rate providing a simple and transparent path back into the workforce for those currently caught in the benefits trap.

The problem is the cost: there are upfront administrative costs and then the much bigger issue of whether the overall benefit bill itself would soar as a result of relaxing the means-test culture that contributes to these marginal penalties.

On the admin cost: IDS points out that about 4.8 bn is lost through fraud or error - in the case of family tax credits, errors are costing about 8% of the whole scheme. By simplifying the credit and moving away from means testing for a core element of the scheme you could probably reduce this markedly; likewise with the introduction of real-time monitoring of people's incomes by the Inland Revenue (a proposal currently on the table).

However I am told the upfront cost of implementing the Universal Credit would be 3bn. For this reason the Treasury told IDS to go away and look at other alternatives, which are given a cursory treatment in the report: a single taper for all benefits; a single working-age benefit, non-means-tested for the first 12 weeks; and the so called Mirrlees model advocated by the IFS, which groups family credits and benefits into a "Family Allowance" style universal benefit.

What's striking is the philosophy behind all the proposed models: all want to move away from the myriad of means tested benefits towards a concept that an individual or family has a level of income in society as of right, and that state support for that income has to be transparent, easy to understand and hard to "game", and must cease to sustain a "benefits culture".

I'm told the Treasury is fighting a rearguard action against the implementation costs. But the bigger question is left hanging. Does the overall benefit bill have to become bigger in the short term? The document says:

"In the current fiscal climate we need to strike a balance between incentives
and affordability. This trade-off would, in particular, affect the rate of withdrawal
that is feasible if a Universal Credit is introduced."

So the crucial question for IDS and his lieutentants is the "rate of withdrawal". There are no costings in the document for the Universal Credit, at any of the theoretical "withdrawal rates" examined. But the whole direction of the emergency budget was to be stingier with benefits, not more largesse.

There lies the fault-line that the Coalition must approach as it grapples with its two strategic goals: deficit reduction and welfare reform.

And I will add one other caveat, which I call the Tony Collins doctrine, after my famous former colleague on Computer Weekly. As Tony always points out: if you walked into Whitehall and proposed to build a bridge from Britain to America you would be laughed at. Propose scrapping the entire welfare system and replacing it with an as yet untried and uncosted, albeit philosophically neat alternative and... well, we'll see the response tomorrow.

Spain's pain goes beyond the busted cajas

Post categories:

Paul Mason | 19:40 UK time, Wednesday, 21 July 2010

In order to see this content you need to have both Javascript enabled and Flash installed. Visit BBC Webwise for full instructions. If you're reading via RSS, you'll need to visit the blog to access this content.

The land around Sesena is dry. In fact the name La Mancha, the Spanish province it is part of, stems from the Arabic for dry land. And in the 800 years since the Spanish reconquered this terrain, it's fair to say that nobody managed to conquer the thistles. They stand head high, big as your fist, in the dusty fields competing only with wire-sharp grass and discarded tyres.

For 800 years this area was one of the most sparsely populated in Europe. Then came the Spanish property boom. A speculative developer built 13,000 brand new flats in the middle of nowhere. Then the boom ran out, as did the developer's political influence and access to credit.

Nine whole blocks at Sesena stand empty; the rest stand partially occupied, their ground floor retail units bricked up. They're decent flats, with a swimming pool and basketball court in every quadrangle. But many of those who live here now can only afford to rent: migrant workers from Latin America or north Africa, scraping by on part-time jobs. Even at 100% finance - and it still exists here - buying is off the agenda.

It's not until you see Sesena that you realise the mess Spain is in. Because there are one million brand new unsold homes in Spain. And these homes don't just litter the landscape: they sit as bad debts on the books of Spanish banks. And the problem is nobody knows how bad the debts are - because prices are still falling (another 25% is the best guess of Barclays economists).

That's why the Spanish finance system has become the object of acute curiosity in the run up to the stress tests set to be announced by the Committee of European Banking Supervisors on Friday evening.

Spain's big banks are rock solid. Their system was designed to be counter-cyclical - so they were obliged to hold more capital than banks in the Anglo-Saxon system, and the mortgage system forces a lot of the risk onto the homebuyer. But the problem is the cajas.

Cajas are small, local savings banks. They go back to the 19th century and are technically mutual companies, owned by no-one. Often they have local politicians on the board and even priests. Already I can hear you thinking: what could possibly go wrong with a bank run by politicians...

It turns out the cajas lent around 450bn euros to the property developers and face estimated losses of 45bn. The Spanish government, after some hesitation, has moved to restructure the cajas - forcing some to merge, seizing the assets of others - and stands ready with a 90bn euro fund to bail them out if necessary.

But the cajas are not Spain's biggest problem. Its problem is structural and will not go away even if we get through Friday with only a modicum of blood on the carpet.

Spain's unemployment rate stands at 20%, 40% for young people. Its domestic economy has been in recession for nine successive quarters, with only exports keeping the official GDP figure above zero in 2010. The construction sector, which at one point accounted for 12% of GDP, has collapsed.

Now the public sector, which was also large, is being slashed: a 5% pay cut across the board for employees, and further cuts to pensions and public services, will take 15bn euros out of the economy for starters.

With the credit markets tight, and growth flat, there are also signs of core deflation. If you add that to massive bad debts in the private sector then Spain becomes the first candidate country for a disease economists first noticed in the 1930s: debt-deflation. If debts remain high but incomes fall and asset values fall, you get a death spiral or at the very least a Japanese style decade of stagnation.

The remedy is budget cuts and an end to the model of social welfare and generous labour rights Spain has enjoyed since the fall of fascism. Actually, it is even more complicated, since one of the key labour rights bosses dislike - the right to 45 days redundancy pay for every year worked - is a hangover from the Franco era.

At Rubi, in Catalonia, Francisco Elias guides me through his small engineering factory. Bombas Elias makes pumps and sells them to 23 countries. But once the cajas got into trouble, Francisco saw a projected loan of 750,000 euros unceremoniously withdrawn. Now he's struggling, laying off workers and downsizing; in future he'll outsource more, offshore more. He survives, for now, on the goodwill of his customers.

So the caja crisis eats through to the industrial crisis and feeds into the problem of unemployment, which is massive.

Spain's government - as the Deputy Finance Minister Jose Manuel Campa tells me - has a plan. Restructure the cajas, boost exports, deregulate the labour market so that the core of workers with strong employment rights is replaced with a more flexible, younger workforce.

But Spain is a young democracy whose institutions are untested in prolonged austerity.

On a demo of one million people, on the streets of Barcelona two weeks ago, I saw conservative nationalists march alongside communist shop stewards in favour of political autonomy for Catalonia. On the demo the whole demographic rainbow - from anarcho youth to well-heeled professionals - told me the same thing: we're paying too much to central government, we're sick of Spain, they're sick of us.

The main slogan was "Adeu Espanya" - which you don't need to know Catalan to understand. And - slightly chillingly for a country that was once fascist - more than one young person informed me: "democracy isn't working".

Javier Díaz-Giménez, a professor at the IESE business school in Madrid, is pessimistic about the prospect of structural reform.

"The swing voter, the man who decides the election, is a guy with a secure job, good wages, guaranteed pension, a subsidised railway system, free roads - and he's not going to vote to give that up."

"So nobody can reform Spain?" I ask.

He smiles ruefully:

"The markets will."

Deficit reduction, Greek style

Post categories:

Paul Mason | 16:44 UK time, Tuesday, 20 July 2010

Six months on from the shock of finding out the country's deficit was twice the size previously reported, the Greek government has today published the results of its deficit reduction actions. These make interesting reading, and provide a new case study to add to the various Canadian and Swedish examples touted around by pro-Coalition think tanks.

The Greek government is by no means out of the mire - but it is slashing its deficit faster than promised and by two simple expedients. It is collecting a lot more tax and spending a lot less money, immediately.

And from the evidence presented today, it's not only the structural reforms of salary cuts and pension reforms to the public sector that have delivered immediate bottom line benefits: the government simply stopped consuming.

The Greek central government managed to raise its tax take by 7% and slash its spending by 12% compared to the first six months of 2009. As a result it has slashed its first half deficit by 39%.

This, of course, will be hard to sustain if the scale of austerity now tanks real economic growth. And hard to repeat here: with very little effort (and a metaphorical big stick) the Greek finance ministry has forced all those doctors and dentists whose annual incomes were supposed to be 30k Euros to get real and pay up. The New Economics Foundation estimates there's a maximum of £50bn to be raised here from a total crackdown on tax evasion, but it would need more than just applying the existing law to the small fry.

The most eyecatching part of the Greek figures out today is the 52% fall in government consumption. This is staggering and has been achieved by an immediate reduction in two spending lines the Coalition government in Britain is unwilling to touch in the short term: health and social security.

One final point is, the May 10th bailout is also having a benign impact: instead of increasing by 5%, Greek borrowing costs actually fell by 13%. It's early days but this is the first case study of rapid deficit reduction: we've already seen the consequences in terms of social unrest; but the pain has only started.

Spain's victory: the style, the meaning, the economics

Post categories:

Paul Mason | 20:55 UK time, Monday, 12 July 2010

In order to see this content you need to have both Javascript enabled and Flash installed. Visit BBC Webwise for full instructions. If you're reading via RSS, you'll need to visit the blog to access this content.

I think it was the philosopher Goethe who, huddled with Prussian troops defeated in an early Napoleonic battle, said something along the lines of: "don't be downhearted, at least you've seen the new world born".

I felt like saying something similar to the few Dutch fans scattered around Barcelona's Placa Espanya last night. However they were a bit distracted because, along with 75,000 Spaniards they were dancing in the fountains in conditions of semi-nakedness.

I'm in Spain to cover the problems with the country's banking system, of which more below, but first - the football.

In pure footballing terms, Spain's victory signals a revolution. It's the same revolution that Barca's victory over Manchester United signalled in the Champions' League in 2009 - the emergence of a style of football based on intelligence, passing, possession, teamwork and above all lightness of touch.

It's not like that style of football is inevitably victorious - but it does seem to leave north European teams whose emphasis is on speed and brawn completely floundering; it forced the Dutch to resort to what Johann Cruyff has called "anti-football".

I can tell you that here an explicit line is being drawn between the football revolution and a lot of other, more serious stuff. The Spanish journalists and cultural commentators I've spoken to believe this is a big symbolic event for Spain - signalling that it's not, as the ECB and the Euro-finanial press claims, a basket case facing imminent collapse. Its solid banks, big manufacturers and infrastructure companies, goes the theory, will pull the economy through and mean that the social model - though it may have to be tweaked - will survive.

Another obvious social and political fact resonating off last night's events is how Spain has modernised socially. I watched the match in a bar full of Catalan people, some of whom had been on the million strong demo in favour of independence from Spain the day before, carrying banners saying "Adeu Espana". As they surged onto the street last night they were all for Spain, and they were met by the entire staff of a Pakistani-owned pizza shop called Al Capone's, who surrounded me shouting (in English): "We are Spanish, we are Spanish. We Love Spain!". On the streets where the Catalan flag and language were once repressed, people used both to celebrate the Spanish victory. IN a landscape shaped by inquisition-era Catholicism, gay men leapt around in the fountains wearing only bathing trunks bearing the word "Espana".

Basically, as in the Facebook profile option, "it's complicated" - and there is no going back.

The question now though is how Spain goes forward. As I've written before, the social model in Southern Europe has been based on two decades of cheap credit, property speculation and growth. Now that's over, it's obvious a country like Greece has to go through a painful adjustment. Here the austerity plans are nowhere near as draconian, and the resistance is also not exactly at Greek pitch.

I would say if they can get over the bump in the road that is restructuring their small savings banks, called Cajas, the Spanish people can probably get away with less severe austerity than is being promised in Britain. Also, when it comes to rebalancing, they have a much stronger export economy - a fact all too obvious here in Barcelona as you travel past miles of docks, car plants, steel and ceramic production facilities.

In the globalised economy, nation states have to define themselves in terms of global choices: in business Spain tried to have solid banks and a housing bubble, and got into difficulties; in retail it has chosen fast fashion; in automotive it has chosen to be the "fun: euqivalent of VW; in football it has chosen to reinvent the beautiful game as a kind of muscular chess played by androgynous male supermodels. But it beat everything the world had to throw at it.

There is something wierdly consistent about the tiki-taka style of football, the ultra-cool night life, the co-existence of ultra-liberal lifestyles with one of the most conservative forms of Catholicism on earth. My problem, as I puzzle over it less than 24 hours after Iniesta's goal, is - I can't work out what it is.

Watch my report on the World Cup Final on Newsnight tonight, and on the banks next week.

More from this blog...

Latest contributors

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.