The impeccably New Labour case for scrutiny of top pay

By Sunder Katwala / @nextleft

Tom Harris is worried about calls for action on top pay, fearing we are on the slippery slope to repudiating New Labour. This seems to be driven by Harris’s specific worry that “I imagine the so-called High Pay Commission would have the aim of setting a national maximum wage”.

I think that is very unlikely and almost certainly unworkable. (I wrote about that a few months ago, when Kevin Maguire pitched a 10-1 ratio to the Fabian dragons at our New Year Conference. The Compass proposal is also to consider maximum ratios within organisations. As David Aaronovitch grumpily but correctly observed at the Fabian conference, there is little inherently fair about the tea lady or receptionist at Manchester City being paid oodles more than at Altrincham FC. And there was an impeccably Brownite objection from the conference floor: ‘what public services will you cut to replace the lost revenue’).

But a maximum wage is not the only way to address top pay, especially as the explosion in pay at the top was more about shifting social norms than it was about legislative change.

But I fear that Tom may be forgetting an important part of the history of New Labour – which was concerned from the start about unfair rewards and social responsibility at the top – and so overlooking an impeccably New Labour case for scrutinising top pay too.

Yes, he is right that the minimum wage was a New Labour policy, because it was part of the argument that social justice and economic success were not incompatible, and one of the measures introduced (with tax credits) to “make work pay”. But New Labour also voiced anger at “rewards for failure” and “undeserved rewards” at the top. We heard a lot about fat cat Cedric Brown, and the “windfall tax” was adopted on the fairness grounds that privatised monopolies had been guaranteed an excessive return, and that part of this windfall should support social inclusion.

If New Labour always opposed ‘rewards for failure’ and unearned rewards, it has considerably more reason to do so not just on the fairness grounds that one can not privatise gains and socialise losses; but also because the entire economy has been sharply affected by mistakes made in the financial sector.

Harris worries about ‘raising a few cheers by depriving some bankers of their bonuses’. But that risks sounding like a defence of whatever institutions decide to do or individuals can get away with, whatever the consequences. In which case, why do we have financial regulation at all? The evidence set out by Deputy Bank of England Governor Andrew Haldane in this speech is compelling. Robert Peston offers a useful summary of how the historic explosion in pay and bonuses in the financial sector was not based on creating wealth yet created systemic risks for the financial system and entire economy.

So reform of bonuses is needed not for cheap political crowd-pleasing but to uphold Tom’s New Labour principles of financial stability and ensuring rewards are earned. More scrutiny might have led to social and political pressure on institutions to adopt safer practices. It might help to embolden shareholders to have challenged the patent absurdity of contractually “guaranteed bonuses earlier. (And there is a broad consensus on that – “Certainly, the Masters of the Universe need their wings clipping, but the way to achieve that is through effective regulation”, writes David Blackburn of The Spectator today).

Peter Mandelson bemoans the fact that his critics do not acknowledge that his intense relaxation about people getting filthy rich had a condition – “as long as they pay their taxes“. Tom’s New Labour principles of “something-for-something” and “rights and responsibilities” legitimise a strong scrutiny of tax avoidance as of

And Roger Liddle – who was co-author with Peter Mandelson of one of New Labour’s founding texts ‘The Blair Revolution’ before 1997 – set out several good social democratic and rather New Labour reasons to worry about income inequality and unearned rewards at the top in a Policy Network paper, which also also called for a Top Pay Commission in January 2008:

“A Top Pay Commission to match the Low Pay Commission that would scrutinise pay awards to top executives in the private as well as public sector, with a remit to expose unnecessary excess and create a more open debate about just and proportionate rewards.”

Tom is right that New Labour was worried about being seen to “level down”, as Liddle acknowledges. For this reason, even though it adopted very clear policy commitments to reduce inequality, it shied away from describing them as such. Tony Blair committed in 1999 to reducing and eradicating child poverty. The government, of course, defined poverty in relative terms; something which the Conservatives now accept too, but there was a reluctance to acknowledge what logically followed: that the government’s strategy was to reduce income inequality; this was reflected in its ‘progressive universalism’ approach to redistribution, though in practice this proved an exercise in ‘running up the down escalator’: sharply rising inequality was curbed; it was not reversed.

In fact, inequality within the middle 90% of the income range has been reduced; but the Gini coefficient has gone up because inequality has increased at the very top.

So Liddle seeks a New Labour response to this, which is more explicitly able to discuss inequality at the top while noting that was always part of the new Labour argument:

“What is needed in the UK is a change in political culture and discourse about questions of income and wealth. In The Blair Revolution published over a decade ago, I wrote “New Labour should use the tax system to attack unjustified privilege, withoutweakening incentives for risk-taking and hard work.” In crude and simple terms, we need to move from a society that is afraid to ask “How much have you got?”, to one that is prepared to question “How did you get it?” This was how Winston Churchill as a radical Liberal sought to turn the political argument in defence of Lloyd George’s redistributive 1909 budget.”

“In the early 20th century it was landowners who were seen to enjoy gross excesses of income and wealth, for which in Neville Chamberlain’s wonderful use of Biblical language “they toil not, neither do they spin”. The gross excesses of 21st century Britain are in different social categories: directors whose compensation packages have little or no justification in terms of their contribution to the profits and success of the companies they lead; investors who take advantage of Britain’s generous capital gains tax provisions but are not genuine risk takers, building a business from scratch through their own hard work; individuals who owe their comfortable circumstances to inheritance rather than their own efforts. What is needed in the UK is a change in political culture and discourse about questions of income and wealth.”

I don’t know if Tom would think that is the “politics of envy” – but these are now sentiments expressed, if with differing degrees of emphasis and sincerity, across the political spectrum.

It is not surprise that Iain Dale champions Harris’ concern that scrutiny of top pay would be to retreat to a ‘core vote’ strategy.

However, I do not think that either of them have any evidence for this claim. Certainly, there is much solid evidence, including in the recent Fabian study for the JRF that the centre-ground of public opinion wants considerably more scrutiny of the ‘how did you get it’ question, and from a deep-rooted sense of fairness rather than an envious motivation.

This reminds me of all of those arguments that New Labour was ‘abandoning the centre-ground’ with its new top rate, when two-thirds of the electorate back it. Funny centre-ground that.

Meanwhile, David Aaronovitch in today’s Times does not want a Pay Commission but goes rather further. He would like tax returns made public.

This Swedish style pay nudity policy would break a considerable Anglo-Saxon taboo. It seems unlikely to me. A pay commission could, however, examine what the international evidence suggests as to what effect transparency has on issues like gender pay gaps and levels of inequality, perhaps suggesting other routes to bringing more sunlight to the issue of pay and renumeration in organisations, without necessarily adopting Aaronovitch’s full monty suggestion.

Certainly, there must be ways to improve a woefully underinformed public and media debate about what the facts about incomes and inequality in Britain are, despite the valiant efforts of the TUC to set out where the real middle is – and that the median income is £20,000 – are woefully underinformed about this.

As Aaronovitch summarises today, discussing the Fabian research:

“£120,000 per annum puts you in the top 1 per cent of salary earners, £60,000 in the top 5 per cent, £32,000 in the top 25 per cent. And £25,000 makes you average – if you’re a full-time worker.”

Across the income range, participants in the Fabian/JRF research workshops believed that they were around the middle.

Everybody does – from people on the poverty line to Alan Duncan on his parliamentary rations.

And then there is the astonishing ignorance of top earners who think the poverty line is at £22,000, that median earnings are twice that, and who believe that 10% of us earn over £162,000, according to the focus group with the best and brightest captains of business, finance and the law held for the Polly Toynbee and David Walker book.

Some of our own rather less super-rich participants also simply refused to accept the claim that an income of £42,000 was 10% from the top and challenged that as a mistake. But then I have often had that experience speaking to national newspaper journalists about what the income distribution actually is.

So anything which creates a more informed public debate about the basic facts of the society we live in has to be worth considering.