Who runs Britain? (new book) - Pointing fingers at the plutocrats
Quote:Pointing fingers at the plutocrats
Last Updated: 12:16am GMT 27/01/2008
In an extract from his provocative book Who Runs Britain?, Robert Peston looks at the roots of the current financial crisis and blames a political pact with the super-rich for impoverishing the rest of us
Best of British? Our financial system is attractive to the super-rich
When the going was good, investment bankers, hedge fund managers and partners in private-equity firms all did very nicely from the bonuses and the capital gains and the fees generated by the frenetic manufacturing of deal after deal after deal. Many of them are now paying a price for failing to understand the risks they were taking on. Don't weep for them. They have already extracted fortunes.
Your view: Who runs Britain?
It is most of us who are paying for their foolhardiness, as the pricking of a financial bubble they created has a negative impact on all our prosperity. Months, possibly years, may go by before banks are prepared to lend as freely as they had been doing. The price of money is going up for all of us, and the economy is slowing down, because regulators and governments did not dare stop the over-exuberant behaviour of greedy traders, bankers and financiers. In fact, the Government encouraged the excesses of these super-rich individuals and their financial servants because they were thought to be good for London and good for Britain.
There is collusion between most politicians, bankers and investors to avoid asking the big question: has the freedom of investment banks, private-equity firms and hedge funds to buy and sell what they like, when they like, gone too far? That would be to threaten the return to full throttle, whenever it comes, of the most successful machine in the history of the world for expanding the clone army of the super-rich.
Northern Rock's collapse makes Britain less alluring to the man in the street
The triumph of the super-rich has been the most striking social phenomenon of the New Labour years. The presence on British soil of a disproportionate number of immensely wealthy people, who are becoming wealthier by the minute, has been encouraged by Tony Blair and Gordon Brown. On their watch, thanks to benign tax rules, Britain has become a billionaire's paradise. In a whole range of businesses and industries, the talent of individuals is rewarded in tens of million of pounds, while the relatively poor are getting poorer.
In this jungle, where the super-predators feast best, some 30,000 people earn more than £500,000 a year, and their average income is £1.1m. They are the top 0.1pc of British earners with a combined income of £33bn, or about 4pc of all personal earnings in the UK. That is more than the value of the entire economy of Vietnam, a country with a population of 84m.
To appreciate the growing gap between the very rich and the rest, you have only to look at the ratio of bosses' pay to that of employees in general. An annual review by Income Data Services showed that the median total earnings of the chief executives of the FTSE 100 companies - the UK's 100 largest quoted companies - in the financial year 2005/06 was £2m, up 20pc on the previous year.
By contrast, the gross median pay for full-time British employees in April 2006 was £23,600, up a mere 3pc on the previous year. So the typical FTSE 100 boss earned 75.2 times what the typical employee was paid - and just one year's pay rise for that typical boss was £400,000, equivalent to 17 times the total pay of the typical employee.
But those who run our largest companies, the members of the FTSE 100 index, are not by any means the best paid in the UK. Among the new generation of plutocrats, they're pretty low down the hierarchy. The high-earning elite is to be found in the financial sector, where a combination of globalisation and a technological revolution has allowed a talent for making money to be rewarded in ways that are breaking all known barriers.
Millions of pounds, tens of millions, even hundreds of millions, are being accrued by brainy individuals who create and trade almost incomprehensible new financial products. These individuals may have the nous to spot and buy entire companies that are undervalued. Or they may be computer whizz-kids who build complex computer programs to exploit minute, temporary anomalies in financial markets.
What's more, a few individuals are generating hundreds of millions of pounds for themselves as more or less sole traders in the business of buying and selling entire companies. The most successful of those is Sir Philip Green, owner of Bhs, Topshop and quite a lot of the rest of the high street, who paid himself a tax-free dividend of £1.2bn in 2005 - though technically the dividend went to his non-resident wife, to avoid the payment of tax.
Prime Minister Gordon Brown gets up close and friendly with the global brand 'David Beckham' who netted a £125m pay deal from LA Galaxy
These inordinately wealthy people are British, or American, or Russian in name, but they are essentially stateless, living where the taxes are lowest and where the opportunities to increase their net worth are greatest. For a variety of reasons - technological, regulatory, economic - increasing amounts of wealth are sticking to individuals with special talents, rather than being dispersed to the owners of public companies or being siphoned off by the state in the form of tax.
That's true whether you are a footballer born in Madeira, like Cristiano Ronaldo, or an Indian steel magnate, like Lakshmi Mittal, or a British hedge-fund superstar whose father was a car mechanic, like Chris Hohn.
The marketplace for an individual's talents - whether as a manager or an inventor or a performer - is the whole world, which means that the returns generated by the relevant talent can be huge. Take David Beckham. The 'Beckham' brand is a global brand: his name sells more around the world by a substantial margin than that of his new employer, the Los Angeles Galaxy. That's why he can negotiate a contract with his Californian football club supposedly worth £125m to him.
Steel magnate: Mittal
Many of the newly created businesses can go global remarkably rapidly. Based in the UK, Permira - a private equity firm that buys and sells whole companies - has in just a few short years become an international powerhouse controlling many billions of pounds, even though it employs just 103 professional staff. Faster still has been the wealth creation among the younger generation of internet businesses, the Web 2.0 gang, from YouTube to MySpace to Facebook.
In other words, globalisation has been wonderful for anyone with a special talent capable of generating incremental revenues. The crucial word here is 'incremental'. If you can demonstrate that you have the magic to generate additional revenues, then you can do very nicely. The reason is that the market for the fruits of your talent is bigger than it has ever been. For many products and services, an almost seamless, all-day-and-all-night, worldwide marketplace with billions of customers has been created by the internet and the dismantling of barriers to trade.
Hedge fund star: Hohn
The sums of money now accruing to top talent, especially in financial services, have become absurdly large. Some people are earning in a single year sums that they would not be able to spend in a lifetime, or indeed the lifetimes of their children and children's children.
Why should any of us care? For one thing, it's not healthy for democracy. The new super-rich have the means through the financing of political parties, the funding of think-tanks and the ownership of the media to shape Government policies or to deter reform of a status quo that suits them.
It could be expensive for Labour as a political party to upset many in the City by imposing seriously higher taxes or tougher regulations on the operation of hedge funds and private equity in a way that curtailed their profitability, even if there was a strong public-interest reason for doing so.
How so? Well, since 2001, the private equity doyens Sir Ronnie Cohen and Nigel Doughty have contributed £1.8m and £1m respectively to Labour, the former Goldman Sachs partner John Aisbitt has given £750,000 and the hedge-fund executive William Bollinger has handed over £510,000. Tony Blair decided it was preferable for Labour to be financially dependent on wealthy individuals than on the party's trade union founders; but both forms of dependence can create conflicts of interest in the formulation of policy.
But the biggest cost from the swelling of the super-rich class is an erosion of the fabric that holds together communities and the nation. The plutocrats who live here behave as though the UK is permanently on probation. They pay the least amount of tax they possibly can, a fraction in percentage terms of the tax most of us pay on the income we earn. They rarely allow themselves to be comfortable in their Britishness, whether they have been born here or have adopted the country. And they would never surrender their right and ability to move somewhere else should the financial tariff for staying in the UK rise above an unspecified threshold.
What's more, Gordon Brown's actions when Chancellor underpinned this idea of the super-rich doing us all a favour by living here, since he very carefully shied away from ever alienating them; which explains in part why the burden of tax increases has fallen on the vast majority who are not quite wealthy enough to relocate to Monaco or the Caymans.
Brown may be right that the presence on British soil of wealthy entrepreneurs who pay little tax in their own right is beneficial, in that they create or expand businesses and employment. But it is demeaning to the authority of the state and insulting to the majority of taxpaying citizens that so little in tax is collected from them.
One group who wholly legitimately avoid paying much tax are those who live here but claim that they are non-domiciled for tax purposes. In order to qualify for this privilege they would typically have been born abroad - but these 'non-doms' have frequently lived in the UK for decades and some have generated impressive fortunes from a UK base.
There was a time when Gordon Brown was hell-bent on cracking down on the non-doms and also on those British-born people who continue to operate businesses and own assets in the UK but become resident offshore for tax purposes. But, around 2002, his zeal to tax them on their total worldwide earnings evaporated. He became anxious that merely insisting the super-wealthy pay the tax that most of the rest of us pay - such as the top 40pc rate of income tax on all their global earnings and 10pc on realised capital gains - would lead to a flight of valuable capital and brains abroad.
However, if they weren't to flee these shores, the sums that could be raised from them would be quite something. In 2006, the accountants Grant Thornton estimated that 54 UK-based billionaires were paying income tax of just £14.7m on a combined fortune of £126bn and only a tiny number paid any capital gains tax at all. Of these, at least 32 of the billionaire dynasties had probably not paid any personal taxes on their wealth.
For years, both Labour and the Tories were too afraid of the super-wealthy - or too close to them - to campaign that they should pay their fair share of tax. Senior politicians of both parties have been fearful that they could be painted by the media (much of it owned by the super-rich) as somehow 'anti-success'. And they tend to enjoy being in the company of business winners. Tony Blair, when he was Prime Minister, valued the friendship of successful business magnates, from Rupert Murdoch to Charles Dunstone, the founder of Carphone Warehouse. Both parties also benefited from the generous donations of fabulously wealthy individuals - which they would not have wished to jeopardise.
This Government has cynically exploited one of the harsh realities of globalisation, which is that millions of people on middling incomes in middling jobs do not have the clout to demand the tax reductions that the super-rich have. Only a limited number of very big businesses or stunningly talented entrepreneurs can actually up sticks to anywhere in the world, if the tax rates here are not to their liking. So tax increases have tended to be directed towards those who cannot escape them: the most important measure in Gordon Brown's last Budget as Chancellor in 2007 was to cut corporation tax for big companies, to deter them from moving abroad, while increasing it for small companies, most of which would find it almost impossible to emigrate.
By design of a Labour premier, Gordon Brown, and a socialist mayor, Ken Livingstone, London is now the capital city of the borderless world of the super-rich. But the reinvention of Britain as a giant tax haven also brings costs, for all the contribution of the immensely wealthy to economic growth. The inflated price of residential property has created wealthy ghettoes in parts of London and the South East where no one earning less than a few hundred thousand pounds a year can contemplate living.
That is a small example of a modern paradox: at a time of unprecedented prosperity, young people face greater financial uncertainty than they have for decades and many of those in middle age and on middle incomes would be justified in believing that the current economic and stock market boom had passed them by.
They are victims, too, of the collapse of a British private sector pensions system that was until recently the envy of the world. The super-rich may be effortlessly becoming richer, but millions of people have been obliged to contribute more cash than they have ever done to guarantee even a modest income in retirement. Hard-pressed company pension schemes that were once a model of enlightened paternalism are now being transferred to specially created new companies backed by the super-rich - who see in them an opportunity to make a fortune for themselves, though not for pensioners. There is something unseemly in the way that the retirement hopes of millions of people who have saved all their lives can be bought and sold as though they were no different from Mars Bars.
What concerns me is the lack of serious public debate about how globalisation and deliberate Government policy have empowered those with particular financial talents to make vast sums of money for themselves, while disempowering the rest of us. The financial crisis of the summer of 2007 - manifested in the run on Northern Rock, the first run on a substantial British bank for 141 years - was a direct consequence of the pervasive and orthodox Anglo-American ideology that the liberalisation of global financial markets is both intrinsically good and unstoppable.
The extraordinary creativity of participants in these markets has spurred growth over many years, by directing money or capital to places where it can best be employed. But their success bred complacency. Innovation became malign: trillions of dollars of financial products were created and then sold to banks and investors, many of whom did not understand the risks they were taking on. It was not unlike a pyramid-selling scheme, which could be seen from the mass panic that took hold in August 2007 when a big French bank said it could not put a value on these products.
Who Runs Britain? by Robert Peston (Hodder & Stoughton, £20) is available for £16 + £1.25 p&p from Telegraph Books on 0870 428 4112 or go to http://www.books.telegraph.co.uk
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