One of the first sound-bite attempts of Ed. Milliband, as the newly elected Labour party leader, focussed on the Squeezed Middle of the British electorate for his future national election prospects, although he lost some credibility when questioned due to not being able to more precisely define what he meant by this part of the population. Indeed, the squeezed middle according to Mr Milliband seemed to include anyone neither very rich nor very poor i.e. just about everybody else or perhaps the 75% in the middle who also contribute around the same proportion of total income tax taken by the government. It is interesting then that Reuters today (24 January, 2011) issued a report on Life in Europe »s Squeezed Middle.
In summary, even as Europe has begun to grow again, the global financial crisis which has adversely impacted tens of millions over the last three years is still influencing people and households to watch their budgets, save more and avoid over-extending. The plans and hopes of a generation are seen as having been scaled back and, even if the general economic situation improves, will affect the continent of Europe for years to come. Examples of the experiences so far of austerity affecting relatively affluent people are described for Spain, Germany, Greece, Romania and Britain. In Spain, working Spaniards are facing the fact that they will not be as rich as their parents. Germany is booming again but the experience of being forced to work shorter hours to keep more people employed has left many workers scarred. In Greece, there is a growing wave of emigration. For those Romanians who managed to avoid getting into too much debt from the wide availability of cheap credit, when Romania was the fastest growing economy in the EU two years ago, there are hopes for a better year ahead.
Addressing Britain, the example from the squeezed middle is a young mother with two children and currently unemployed but, thanks to the British policy of mixing affordable social housing with high-end real estate, receiving a subsidy from an independent, not-for-profit housing association to live with her family in one of the most expensive areas of London, next to Westminster Abbey and Big Ben. She, her partner and two children are currently insulated from the impact of the cap on housing benefit introduced by the government as part of the £81 billion public spending cuts. However, their monthly rent of £600 is only a third of what they could be charged on the private market if they were forced to move. That said their annual income of £32,000, just above the national average, comes largely from her partner who works for the London police but is concerned about the security of his job, given the 300,000 public sector positions expected to disappear with government budget cuts, including thousands in the police force. Even if he keeps his job, he will find his pay frozen for the next two years and be paying more into his pension fund. This squeezed middle family is, therefore, already cutting back on unnecessary expenditure before they start feeling the effects of the government cuts.
Considering the examples taken by the Reuters reporters, the squeezed middle covers a rather broad spectrum of which one imagines Conservative party strategists are already well aware. It also seems apparent that although the Office of National Statistics is attributing to the bad weather the unexpected 0.5% contraction in UK GDP for the last 3 months of 2010, the economy currently appears to be stagnating with the squeezed middle concerned about the future and, therefore, cutting back and spending less, offsetting somewhat e.g. the 1% or so growth in manufacturing.
Archive for janvier, 2011
Squeezed Middle
lundi, janvier 24th, 2011Bankers, Bonuses & Competition
mercredi, janvier 19th, 2011Despite the financial downturn and the continuing public furore, JPMorgan last week announced it was paying its investment bankers some £6 billion in pay and bonuses for 2009. Citigroup, Morgan Stanley & Goldman Sachs will issue their results and bonus plans this week, the latter investment bank expected to announce a pay and bonus pool of around £8.5 billion. The results of British banks will be announced in February, the total associated bonus pool estimated at some £7 billion. Even state-owned Royal Bank of Scotland (RBS) is anticipated to pay its investment banking staff bonuses totalling £1 billion.
Excluding the state, the major shareholders in British banks are institutions such as large insurance groups or fund managers (e.g. on behalf of major pension funds), with those holding the biggest stakes including Legal & General, Axa, Fidelity, Standard Life, Scottish Widows, M&G (of Prudential), Aviva and Schroders. Together they hold around 15% of Barclays, 11% of HSBC, and 7% of Lloyds. These institutions are not necessarily content with the level of bonuses being paid out by the banks because they are also aware that these banks are still rebuilding their capital bases. However, they find themselves at the same time trapped by the demands of a market in which the banks have to pay big bonuses or lose staff to their competitors. Institutions are, therefore, looking to the politicians to find a long term solution to what could be considered a structural issue possibly requiring an overhaul of the banking industry, including the key aspect of competition.
The problem for the politicians, however, is that they cannot risk driving the wealth-creating financial sector offshore, its importance to the UK economy having increased as the proportion contributed by manufacturing has progressively decreased before and during the last 13 years of Labour government. Indeed the banks will pay an estimated £20 billion in tax this year. The Prime Minister has, therefore, called for an end to verbal attacks on the banks and blaming them for all the ills of the economy; the bonus tax demanded by his Liberal Democrat partners in government has also not been taken any further at present. Behind the scenes, the on-going negotiations (code-named Project Merlin) between the government and the banks continue to focus on increased lending to small businesses & restrictions on bonuses, in return.
In fact, bank bonus payments on average are expected to be 20% to 30% down on the year before, although this is said to be mainly due to the trading profits of the big investment banks having collapsed last year. The bankers are also seemingly feeling secure enough to suggest that the period of remorse and apology (e.g. of waiving of bonuses and giving to charity) now needs to end, as evidenced by the performance of Bob Diamond, the new Chief Executive of Barclays, before the Commons Treasury Committee. In addition, new regulations in the UK now mean that over 50% of a bonus must be paid in shares and deferred for 3-5 years, half of the other 50% in cash also deferred but linked to performance targets and the remaining cash then falling into the 50% tax band for top earners, with many bankers now given large increases in basic salary to compensate. This reflects the real world within which, however, the public perception also remains strong that bankers still earn significantly more than other professions, despite the taxpayer having contributed hundreds of billions of pounds to rescue the financial system and large numbers of public sector workers continue to lose their jobs, in what also seems a very unfair world.
Of course, if a major bank or open trading nation such as the UK chose to go against the global market, each would be likely to suffer financially and this then points to the need for a global agreement on financial market regulation. In the absence of this, some in the media point out that the banks make large profits mainly due to seriously overcharging corporate clients, companies which are in turn owned by the same big shareholders. Not all of these profits are returned as dividends to these shareholders, a large part being siphoned off to pay bonuses. There are also apparently, suspiciously similar charges for financial services such as underwriting of share issues, while the number of major players in the market has been reduced by banking failures during the financial crisis. Perhaps the Independent Commission on Banking which is looking into how to improve competition in the financial services industry will ultimately feel the need for a full-scale Competition Commission inquiry, as real competition would be expected to squeeze profits and the associated pay & bonuses. It would also be expected to reduce the level of bonuses paid out to (as admitted by at least one senior banker) quite mediocre talent, who surround the stars that really bring in enormous amounts of business and may well indeed deserve their extraordinary remuneration.