I really did mean to write the headline of this piece. For once, I have not misspelt. I think that the time has come for each country within the UK to have a National Wealth Service.
The logic is simple. Right now the government is pouring billions of pounds into support for UK businesses.
I stress that helping businesses is the right thing to do right now: we need to preserve peoples well-being, and that necessarily means that we must preserve those businesses that employ them, as far as is possible.
But there is a massive problem with the support that the government is supply. It is being delivered by way of loans. And there are three problems with loans.
First, they have to be repaid, and that means that the priority of businesses over the next few years will become the repayment of government-backed funding, rather than investment in our future, including making sure business can operate on a sustainable basis. This will suppress the recovery.
Second, because loans are liabilities they are used to calculate whether or not businesses are insolvent. Precisely because so many businesses will make substantial losses during the course of this crisis, which is why they require new funding, many now be insolvent, and these loans only compound these problems. That is not their desired outcome, and it is highly counterintuitive that this is their consequence.
Third, because little active consideration is being given to those receiving these loans many might be going to businesses which need have no place in what is coming to be called the 'new normal'. They are not part of the sustainable economy we need.
What this means is that the system of providing funding by way of loans is flawed, to the extent that it might actually be harmful to the recovery from the current economic crisis that we face. That makes no sense at all.
This is why I have, since the time that this crisis developed, suggested that the support to be provided by the government to business should be on the basis of providing new equity capital and not by way of loans.
Equity capital is, of course, share capital in the UK.
There will be cases, for example with regard to all large loans, that specific conditions might be required to be attached to this new share capital. But in general I think the conditions are fairly easy to suggest. As I suggested in March:
- Zero-hours contracts must be abolished in any company receiving government support, including equity.
- Likewise, any such company must recognise trade union rights.
- It must pay a living wage in the future.
- It must publish its gender pay differential, and have a policy for reducing it.
- It will have to put its full accounts on public record.
- It may not use any tax avoidance schemes of any sort whatsoever.
- It must never use a tax haven.
- If it is a large company it must publish country-by-country reports.
- And, quite critically, every large company involved must have a plan for becoming net-zero carbon and must include the cost of that plan in its accounts, and make annual reports about progress on this issue.
To enforce these conditions it may be reasonable to require that every single company must issue the government with shares that will represent 25.1% of its share capital in exchange for the package that guarantees its survival.
That proportion guarantees the government the right to block many shareholder actions in these companies but, again, to make sure that required actions happen the government should, by statutory right be permitted to appoint a majority of the board of directors in the event that the conditions of the funding are not complied with.
There are three advantages to this suggestion.
First, businesses will no longer be burdened with debt, which is fundamental to the future of companies needing support.
Second, such conditions should deter those seeking to exploit the arrangements.
But most importantly, the proposal provides an upside for the government when at present it only gets the downside risk that these loans will fail. To be precise, this suggestion would ensure the government of a future income stream. And when, and if, the businesses that are being supported are sold (and some will be) the government will get its fair return for the support it supplied at a critical point in its development.
That's why I think that this is the basis for a National Wealth Service - a fund to support the future wellbeing of this country as a result of the support it is supplying now to keep our businesses going.
That support is happening.
I can see no reason at all why that government support to business should be unconditional.
And this proposal provides a return to everyone for the sacrifices that are being made.
It's had to imagine what the objections might be.
-------
After writing this I noted that the Financial Times seems to share many of my opinions on this issue.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
“I can see no reason at all why that government support to business should be unconditional.”
Unconditional support is more or less what was given to the banking sector post-2008 and ten years of austerity was the result for the majority of the population with a bonanza for the lucky winners. We need a better plan and although critics will accuse you of proposing to ‘nationalise everything’ it is fair to nationalise both the risks and the rewards rather than as we have seen in the past a policy of government carrying the price of failure with the private sector taking the benefits when they calculate the risks correctly.
Can you imagine this shower in government at present doing anything like you suggest ? I’m afraid I can’t. Their sphere of interest is way too narrow.
There WAS conditionality associated with the bank bailout in 2008. It fell a long way being short of perfect….. in particular, executives in the industry have been paid lots of money that most of feel is unjust. However, returns to shareholders since 2008 have been meagre or negative and the industry is now much more closely regulated (more equity capital, better liquidity etc.). So, I think there are some lessons (good and bad) we can take from 2008 and use in 2020.
The objective is to (a) preserve potentially useful companies and (b) change their behaviour…… and there are two ways to go.
Richard observes that lending does not solve the problem only equity does (and he is right). But, it does potentially give the state a real choice over how it goes about changing corporate behaviour – through exercising ownership rights or regulation. Note that this could be regulation on a narrow level – only the firms it helped but also broader regulation – whole sectors.
In 2008 a hybrid approach was used (state ownership of RBS and Lloyds, private ownership of Barclays, HSBC… tougher regulation for all)…. and I suspect that this will be the best way forward now. It’s a complex topic but a few random observations from the banking experience since 2008…..
There are few banks so not so hard to keep an eye on them all.
Lending massively was tried first but proved insufficient.
Urgency meant that ownership (where required) came first, regulation followed more slowly.
Ownership of big market players enforces other players to “follow the lead” in products and customer service (eg. Barclays could not charge for a current a/c if RBS did not).
Ownership of big players does NOT force other players to behave well….it has to be regulation. (If RBS improved pay/conditions of its staff it would NOT force Barclays to follow).
Politicians have not exercised stewardship. I suspect this is from ideological grounds but would politicians of a different stripe have the nerve or ability to challenge management teams?
Errrr…… that all for now.
Richard
A ‘National Wealth Service’
I think this is absolutely stunning
This is how we pay for it and where it comes from – all summed up
A National Wealth Service is, I’d suggest, the slogan for the next election…
It is what, in fact, government is for…
Thank you
Thanks Peter
A wiki page coming?
“any tax avoidance schemes of any sort whatsoever”
Can you define this?
Are you talking DOTAS notifiable?
If not, what?
“It must never use a tax haven.”
Use? What do you mean by ‘use’? Have a presence in one? Have a subsidairy in one? A group company? A parent? Suppose that presence is a genuine commericial arrangement?
Which list of ‘tax havens’ would you be using?
“It must publish its gender pay differential, and have a policy for reducing it.”
Would that apply to an LLP asking for a loan?
Without detail, this is just musing, not a serious proposal.
It would be entirely possible to define a tax avoidance scheme
We thought about this when doing the GAAR and some guidance was given
DOTAS is clearly inadequate
Tax havens – the TJN list is the most objective. Cut off at 65.
Your last comment makes no sense.
My point is that any scheme to help business must be simple to administer and quick to apply. Otherwise it is pointless as it would put of potential applicants and/or require an army of civil servants to administer.
“entirely possible to define a tax avoidance scheme”? Really? GAAR with its ‘double reasonableness” test is unwieldy and has produced little. Suppose directors put in place a scheme. At what point does the army of civil servants become involved? Before the scheme is put in place? When HMRC challenge the scheme? When the tribunal trail ends with a verdict?
Tax havens – you haven’t defined “use”. Without a “use” definition it’s meaningless.
“Tax havens — the TJN list is the most objective. Cut off at 65.”
Could be tricky as the UK is at number 13. Ireland is at 11. The top 30 also contains USA, Germany, France, Belgium, Sweden, Italy.
So it’s really important to know what you mean by ‘use’. Can you explain?
Point I’m making is the more complicated the set-up, the more unwieldy and unattractive it becomes.
Fine in principle and theory, but we need things that works in the real world.
You first mentioned this idea weeks back. You must have ironed out at least some of the details by now?
The use issue I addressed here
https://www.taxresearch.org.uk/Blog/2020/05/04/the-five-part-test-companies-need-to-pass-on-tax-havens-to-get-a-bailout/
Solved.
The tax scheme I accept needs clarification – but that’s a detail and not an obstacle
And we do need a list from HMRC as to what is acceptable as a matter of fact
I have long argued for it
Again, solved
The issue needs updating anyway as DOTAS is horribly out of date
We have a model for this in the Industrial and Commercial Finance Corporation (ICFC, later 3i) created after WW2 which (until some numpties decided to take it private for their own benefit) provided equity capital to fledgling businesses. A by-product was that it developed a great many business owners who were then able to share their expertise with future generations. We don’t need to re-invent the wheel, just find one that worked well in the past.
It’s still about
But now a private company, of course
But the model was there as you say
[…] And it is not by chance that I am also suggesting that in exchange for coronavirus bailouts the government should be taking stakes in the businesses it supports – to be used to establish what I have called a National Wealth Service. […]