England expects: Localising skills provision

We ended last week’s essay with a nod to the English deal’s potential to chime with the responsible capitalism agenda. We touched upon the themes of partnership, Business Improvement Districts, social value and sustainability. But responsible capitalists have a meaningful role to play in developing skills and crafts across our country too.

Expanding our skills base across the regions and moving away from a reliance on the City of London is a rational, rather than emotional response to the impact of the crash of 2008. The sums, in short, suggest some reform is needed. At present the UK is paying £5bn a year on the interest rate payments alone on the bank bailout money. The financial sector is also granted an exemption from VAT worth £5bn a year. With less than £7bn taken in from corporation tax, the bank levy, insurance premium tax and stamp duty on shares in 2012/13, questions do need to be asked about the cost-benefits of financial services for our economy and HMRC.

Banking – depending on how broad your definition – makes up between five per cent and 9.4 per cent of national output each year. Over 90 per cent of our economy does not directly involve such activity therefore, yet clearly has been affected by actions within it. Nobody is calling for the destruction of the City, but a review of what the British economy comprises, and what it may comprise in the coming years, seems a sensible enough course.

Rebalancing our economy is not just about creating regional or sectoral parity as ends in themselves. Investing in technical skills rather than encouraging a generation of quants, derivatives traders or financial analysts makes sense in the brass tacks. Between 2002/3 and 2007/8 the manufacturing sector contributed almost double the tax receipt (£378bn to £193bn) of the financial sector despite the latter enjoying a much publicised boom. Peter Mandelson’s (often unfinished) quote about Labour being ‘intensely relaxed about people growing filthy rich, so long as they pay their taxes’ was actually logically fair enough. The problem is that those who grew personally filthy rich were often in the very sector so adept at avoiding such tax payments.

In order to grow the sectors that generally contribute more to HMRC, Labour will need to be bold and use the English deal to empower local authorities and LEPs to make a real difference. The coalition has created a £2bn Single Local Growth Fund – this is a welcome move, but it is far below the £17.5bn of skills funding Michael Heseltine has called to be included in a localised ‘single pot’ on skills. As part of insulating our communities against the effect of future crashes (and central government pulling the rug from under local authorities in response) we should indeed be giving them the power to drive up skill-sets.

In Germany, where the länder hold far greater autonomy than the English local government, the economy continued to grow at an average of almost 0.8 per cent between 2008 and 2012, compared to an average 0.4 per cent reduction in UK GDP. A skilled economy where local communities can shape their response to the vicissitudes of market capitalism and central whim is a worthy goal.

Much of this is a question of perception. As one head-teacher of a technical institution puts it, ‘we’re still at the stage where if someone asks a young person what they are studying and they say Latin, we reply ‘how fantastic.’ If they say they are doing a diploma in engineering, we say ‘oh, right’.’

Buy-in from leading local businesses would be a good start in engendering such a change, but it will take time, political patience, and empowering local authorities to act. It is time to recapture the spirit of Butler’s tri-partite system of education in 1944 rather than the lethargy of the 1950s. By 1961 there were just 237 technical schools across England and Wales attended by 97,000 pupils. This was less than the 250 Wimpy burger restaurants then in Britain, and fewer people than the 100,000 who saw Spurs win the Double in the 1961 FA Cup Final. The policy had died before it had really begun. Germany meanwhile experienced its ‘economic miracle’ of the 1950s, partly helped by the KfW ‘British Investment Bank’ type institution Labour has rightly moved towards in recent years.

Recent encouragement of University Technical Colleges (UTCs) is a commendable start and the former Conservative Education Secretary Kenneth Baker is a determined champion. An initial tranche of seventeen UTCs is set to be followed by a further twenty-seven, with another fifteen further down the line. The JCB Academy in Staffordshire, the first UTC, achieved landmark success in the 2012/13 GCSE cohort with all pupils gaining five or more A* to C grades, including in engineering. Tristram Hunt, Labour’s Shadow Education Secretary from October 2013, has been a vocal advocate.

It is time to develop and resource LEPs and UTCs to really drive up skill-sets, and ensure the private sector buys in sufficiently to afford the prestige to both needed to make them a go-er. In the light of record trading deficits of over £28bn in 2012, re-stimulating our export markets through a skilled labour market seems a pressing concern.

Polling carried out for the Fabian Society indicates the English deal can make some headway here. When given the choice of several options as to how government should interact with private business, encouraging education (55 per cent) and responsibility (42 per cent) form two of the top three most popular choices. Over two thirds of those polled believe that large companies should be required to ‘employ and train apprentices so that they reach set skills or qualifications.’

But ‘government’ cannot just mean SW1. The point is that the private sector will only talk to local authorities if they perceive they are in a position to influence their area. Part of private sector activity will clearly involve big business talking to central government, but if this is the only discussion that matters then the futures of communities will end up being determined in a series of air-conditioned rooms in Whitehall rather than building sites or technical laboratories up and down the country. Greater Cambridge and Greater Peterborough is one LEP pioneering a skills survey to learn what local business ‘really think and need’ – such initiatives are to be encouraged.

As a minimum, the English deal should make clear its broad support for the Heseltine recommendation that ‘the budget for vocational training for learners aged 19 and over, and all funding currently set aside for apprenticeships for those aged 16 and over, should be devolved to local areas through the single funding pot.’ It should also back Heseltine on ensuring that ‘all FE learning providers must consult and agree their provision with LEPs to ensure that the courses they offer to 16-18 year olds reflect local labour market requirements. In addition, any vocational courses delivered by FE providers to learners of any age must conform to the deigned national standards set by employers and industry.’ Labour should be prepared to invite Lords Heseltine and Baker into any commission set up to look at the long-term future of the University Technical College in the coming years.

Localising skills will involve something of a leap of faith – but the incentives for central government are obvious. Lower unemployment increases not only a government’s tax receipts, but also its (re-)election prospects.

Banking and finance

As we noted last week, Jesse Norman is no neo-liberal Tory. Yet his views on the banking system are worth repeating at some length. Writing on Lloyds and Barclays in late 2011, he argued that:

‘Barclays was particularly successful because for many years it resisted centralisation, preferring to keep local managers relatively autonomous and close to the customer.  But today these principles appear to have gone missing. The banks do not acknowledge any moral purpose to their activities, or any privilege afforded to them by the taxpayer. Their operations, those of Barclays included, have become heavily centralised and automated, creating a monotone “computer-says-no” culture far removed from customers and highly rebarbative to them.’

This idea that the link between capital and the supposed capitalists, us, has been frayed to the point of virtual separation is not his alone. Margaret Thatcher’s former chief policy advisor Ferdinand Mount has called for maximum salary differentials between the highest and lowest paid workers at a given bank, whilst ringfencing between retail and casino banking sectors has been on the agenda into and beyond the Vickers commission. There is broad agreement that something must be done.

In particular, however, Norman’s call for autonomous local managers and a decentralised structure has much relevance to the English deal. Maurice Glasman was one of the first to suggest Labour should set up a series of local banks along the German Sparkassen model, a suggestion subsequently picked up by Ed Miliband. But as yet there is no concrete agreement as to where the money for this would come from, nor where the physical infrastructure would be sought.

Capitalising local ‘banks of England’ makes sense for a number of reasons, the most obvious being to get credit moving. In 2011 Germany’s largest commercial banks lent €177bn, some £153.5bn. But their local network of Sparkassen lent almost double this amount – €322bn, around £280bn. Between 2006 and 2011 the big German banks cut their lending, as in Britain. Over the same period the Sparkassen increased their lending by almost a fifth. And where, crucially, were the big British banks lending? As Ed Miliband noted in March 2013, ‘in the ten years before the financial crash, 84 per cent of the money lent by British banks went into property and financial services.’ Both areas which were far from sustainable.

And in a sense the English deal can be about extending the supply of both these areas – getting councils into the house building game again, and increasing competition in the banking sector. 85 per cent of lending to SMEs currently comes from the big four banks, a position which allows them either to charge extremely high rates for their loans, and often makes borrowing unaffordable at all. In January 2014 Miliband pledged to empower the Competitions and Markets Authority to impose a cap on the size of any one of the major banks, and thereby encourage competition.

But the local matters too. Capitalising institutions constrained to lend within their county or city would limit their potential market, and, allied to their genuine link to those to whom they would lend, this would raise their propensity to lend against the cycle. Jesse Norman is right to identify the declining local link between banks and their would-be customers, and the English deal can do something meaningful about that. Such bodies could also raise bonds to allow people to invest in the infrastructure of their local area. With local authorities slowly dipping their toes back in the bond market having left it almost entirely alone for two decades this has much potential to catalyse investment – particularly in housing – up and down England.

It also feeds into other high profile debates. We have heard much of introducing competition into the banking sector and curbing the impact of pay-day lenders. Both are commendable aims, but the first falls down on its reliance on simply creating more centralised monoliths whilst the second still lacks a genuinely forceful cap. A more localised banking sector would help both – with county and city banks lending to small businesses and hard-up locals alike – with capitalisation levels informed by recently published postcode lending data. Endowing all the local banks of England with five per cent of the bailout money, as per Lord Glasman’s suggestion, would take a total of around £6bn. Ed Miliband has also announced that if the big banks are forced to lose branches under CMA sanction they will sell these rather than give them away, and capital will be needed for this too.

There seems real logic in raising this money through financial sector taxation – a broad-based Financial Transaction Tax has been mooted to capitalise the British Investment Bank, and at £20bn of estimated annual receipt from modest levies on shares, bonds and derivatives transactions there is room to capitalise both local banks and the new BIB over a single parliament whilst still holding back over 50 per cent of revenues for international solidarity purposes.

The FTT is an interesting tax to hypothecate future spending against because, as data from 2011/12 shows, HMRC estimate our present mini-FTT on shares to be the UK’s most effective tax at a collection rate of 99 per cent of expected earnings (10 per cent more effective than either VAT or corporation tax). Over 40 local councils – including Green, Independent, Labour and Lib Dem led authorities – have passed motions calling for an FTT in the past year. Perhaps it is time to heed such calls.

As part of the English deal therefore, the power to set up a bank using either the boundaries of a Local Enterprise Partnership or upper-tier authority should be conferred to local authorities and LEPs alike. Such institutions would benefit from guidance from both the private sector and Treasury alike in their early stages. Local authorities should also – perhaps collectively through the Local Government Association – be encouraged to come forward with proposals for how branches of Lloyds and the Royal Bank of Scotland could be transferred into local ‘banks of England.’ If Northern Rock and Bradford and Bingley became synonymous with the collapse of the old banking system, perhaps the Banks of Newcastle and Bradford could herald the beginning of something new. This would be in the interests of a better, reformed English capitalism.

Conclusion

These essays have barely scratched the surface of what the new English deal could achieve. By giving all councils the chance to come forward and demand powers with reasonable expectation they may be devolved, Labour can fundamentally change the conversation about democracy and where it should lie. This is a noble endeavour.

Firstly, it may help re-engage people in the political process. The evidence of the recent period is that people generally vote in greater numbers in elections which deal with greater powers. general elections saw turnout of between 59.1 per cent and 65.5 per cent between 2001 and 2010. Turnout for elections to the Scottish Parliament have usually been around the 50 per cent mark. And, at the bottom end of the power scale, English district council elections in 2012 in just 31 per cent turnout. In Germany, where democracy is more plural, turnout is much higher across the board. It has varied between 71.5 per cent and 77.7 per cent between 2005 and 2013 for federal elections. For elections to the länder (outside of federal election years) Baden-Wurttemberg saw 66.2 per cent turnout in 2011 and Schleswig-Holstein 60.2 per cent. Part of this higher turnout may indeed be cultural, but the point is that the English deal can help change English political culture.

Meanwhile, whilst the notion that politicians are ‘all the same’ may indeed be something of a generalisation, the London-centric nature of our politics means the road to ministerial office does seem to lie through a rather homogeneous set of career paths. Gone are famous local leaders turned national figures like Joseph Chamberlain and George Lansbury. Since the Second World War Barbara Castle and John Major have been rare examples of key figures with a local government background. If we want better local leaders (or certainly a bigger pool of potential councillors) and a more informed conversation between Westminster and local authorities, then passing power down seems a necessary step.

This can involve a whole host of areas not limited to the confines of these mini-essays. An empowered local government can become a new, socially concerned market actor which nudges the private sector into better behaviour whilst delivering on the needs of residents. It can help insulate communities against downturns in global capitalism on the one hand whilst providing capital to grow areas on the other. In energy it complements a temporary price freeze, in finance it can feed into the debate over a British Investment Bank, and it can drive forward a new, greater skilled workforce across the spectrum. The politics of positivity can deliver reforms throughout our land. If Westminster then learns from these, so much the better.

The English deal cannot – or should not – be about devolving powers and funds for the sake of it. But where the local can be good for the national such devolution becomes not only desirable, it is a political necessity.

This is the final piece in the three part series  ’England expects: The new English deal and the politics of positivity’ by Richard Carr and Dominic Rustecki.