The recession will suit the ‘Provvy’ – should we be worried?
One aspect of the recession is the growth of family debt. The Council of Mortgage Lenders predicts that half a million households will fall into serious mortgage arrears in 2009. But, as with all major aspects of the downturn, it is amongst the least well off that the greatest pain is felt.
Poor families were unattractive to banks before the crisis so they’re probably not even allowed in the building now – which is why many poor people fall back on money lending. The biggest provider of what is referred to as ‘home credit’ is a large, profitable and entirely legitimate company: Provident Financial. But ‘the Provvy’, as it is known to its customers, is constantly subject to criticism: For its door-to-door, week-to-week, small cash loans it charges annualised interest rates of up to 200%.
When I was at ippr we had events sponsored by Provident Financial and we came in for concerted criticism from various charities that saw the company’s agents as nothing more than loan sharks who had somehow managed to gain respectability. In contrast, the company itself claims to provide a unique and valued service to customers whom the rest of the financial service industry ignores.
In the end, I decided that the only way I could get to the bottom of this was to spend a day shadowing one of the thousands of Provvy agents as she went on her rounds in an estate in South London.
I was impressed. The collector had been working the same round for years. She knew all her customers well. One mother had just seen her husband put in prison, another was suffering from cancer, a third had agoraphobia. Many people weren’t able to pay that week. The agent accepted their excuses while encouraging them to start chipping away at their loan as soon as possible. One family asked for more money on top of the £50 already outstanding but the agent gently refused, advising them not to get too deep in debt. I ended up a convert. The Provident was providing a unique service to people with difficult lives who desperately needed the personal touch. The customers knew that the £30 loan today would have to be gradually paid back over the following weeks as £35 or £40, but they preferred this to burning up a credit card or begging a bank. The borrowers may have had impossibly tough lives but they weren’t the hapless or ignorant victims often portrayed by the Provident’s critics.
I wrote up my experiences, but it cut no ice with the Provvy’s critics who claimed I had been brainwashed. So, I was fascinated to read a largely unreported piece of research by the Joseph Rowntree Foundation. The Foundation had set out to explore whether a not for profit, credit union type, home loan service could be created with significantly lower interest rates than those charged by the regulated commercial sector. In essence the answer was ‘no’. What’s more, given that, even on the most optimistic of estimates, a not for profit service would have to charge interest rates of 125%, there was little enthusiasm from the third sector to provide the service.
Our social ambition should be for all families to have the economic know how and financial stability to get conventional banking services. But as long as the mainstream banking sector fails to cater for the very poor, and as long as the Government’s Social Fund is too restrictive and bureaucratic for many short term family needs, then the choice is between the Provvy and unregulated loan sharks.
Not all Provvy agents are as good as the one I spent time with, and given what they do and who their customers are, the company deserves and should welcome close scrutiny (not to mention savage mockery [avoid if squeamish]).
But the JRF report (and my suspicion is it will make little difference to the Provvy’s critics) confirms how much easier it is to attack the problems with an existing service than provide a viable alternative.
Job creation and social care – would this work?
Here is an argument you will be hearing a lot as the unemployment figure rises: it costs only a thousand pounds either to keep a family breadwinner in a £30k job or to create a new job for them. Why? Because someone on a £30k salary pays about £11k in tax whilst an unemployed parent will receive an average of £18k in benefits, tax credits and other entitlements.
Looked at this way the Government should surely create jobs for everyone out of work. I said yesterday that my proposal to employ a thousand former regional journalists, or newly qualified journalism graduates, to set up community websites would cost £30million. This assumed £5k start up costs and a gross salary cost of £25k. But if we factor in the cost of unemployment benefits and the tax our website developers would pay, the cost falls to between £5 and £10 million.
Whilst this is a valid case for more job creation it is important to understand three counter arguments, which are, in order of importance:
1. Administrative costs. Employment schemes cost money to establish, to manage and to regulate. It might cost a million pounds plus to establish and manage my community websites.
2. Dead weight cost. Despite a dire labour market we might expect about two thirds of the former journalists and new graduates to get jobs (even if not in their chosen field). So two thirds of the money we spend will not be offset by the benefit tax switch.
3. Displacement. It might be that other third sector and private organisations are thinking of setting up community web-sites. In which case the publicly funded scheme will simply displace other activity (and other jobs).
So, job creation schemes need to be unbureaucratic, well-targeted and avoid displacement.
There is much talk about what will be the new motors for economic activity. Many people hope for a ‘green new deal’. As I have said before, the Government should make its national priority in this area an ambitious and comprehensive commitment to tackling domestic energy efficiency. This might involve a commitment to 90% of homes being made energy efficient by the end of 2011. Low income households would get help free, the rest of us might be asked to sign up to a scheme whereby, in return for help to become energy efficient, we pay a surcharge on our lower energy bills for a fixed period.
Otherwise, I don’t think we can hold out too much hope for green jobs in the short to medium term. The combination of falling energy bills and falling energy use (due to recession) will reduce demand and investment (as we have seen today with more companies pulling out of renewables).
Instead, the focus should be on schemes which allow people to meet genuine social need in ways which the state cannot currently do and the market never will. In doing so we may help to create a new set of services which could – as the economy picks up – become partly self financing.
So, another idea focuses on those with lower level social care needs (who have been abandoned by cash starved local authorities). Based on the sums in my first paragraph an army of unemployed people providing low level care and support for clients and carers would meet real need and save families – and the state – money. Research shows that the market is failing for social care. Many people go into residential care earlier than they need to as they lack the support to stay at home. Residential care costs about £600 pounds per week. If better low level care meant that those receiving care stayed out of a home for an extra three months it would save the state much more than the net cost of employing support workers. And given that we already have the infrastructure of care assessment and services (in both the public and third sector) the administrative and on-costs of running such a scheme should be relatively minor.
That’s two ideas in two days. Any others out there?
Me, Vince Cable, and the Child Trust Fund
Filed under: Credit crunch, Politics, Public policy, The RSA
For some unknown reason I find myself this afternoon on a panel at the National Housing Federation’s Leaders Forum. It’s not hard to see why they chose the other panellists: Lord Falconer, former housing minister and now Chair of a major housing association, Professor Christine Whitehead, housing expert from the London School of Economics and none other than Vince ‘Oracle’ Cable. But why me?
Fortunately it’s a Question Time format. I’ll just have to hope I don’t have to answer first until the joke question at the end: ‘assuming the recession reduces us all to penury what is the one possession you would want to take with you to the poorhouse?’. The answer, of course, would be my socialist-realist painting of ‘Comrade Sister’ Harriet Harman triumphantly leading the post election Labour Party into the wilderness.
I might try to persuade Vince that the LibDems are wrong to want to abolish the Child Trust Fund (only partly because it’s the one genuinely important and useful thing I have ever contributed to). So far, four million accounts have been opened up, many of them by families who would never have previously thought they had the ability or the reason to save. I would have thought if any party stood for the principles of the Trust Fund – inclusion, equity and family thrift – it would have been the LibDems. Latest statistics show that families are increasing their top up into the Trust Fund despite the recession, which reinforces the argument that the CTF encourages the saving habit.
Families with Trust Fund accounts can choose a safer or two more risky options for investment and, with the stock market tanking, the ones who chose the former will be thanking their lucky stars. This will include the lazy and disorganised, as those who fail to open an account themselves have one opened for them by the Treasury. Having said which, the first Trust Funds don’t mature until 2020 by which time even this downturn should be history.
As the equivalent on this afternoon’s panel of the ‘celebrity’ guest on Question Time who is allowed to be idiosyncratic (or simply idiotic), I feel liberated to speculate wildly. It seems to me that one of the effects of the recession is to destroy all the gains made on asset values (on stocks, shares and property) over the last decade. Yesterday the US stock market returned to its 1997 level wiping out the full effects of the last cycle.
The lesson I take from all this is that we should make it a policy objective that average economy wide increases in asset values stay broadly in line with GDP growth. Because GDP rises faster than inflation this still means there are reasons to invest and save, quite apart from the need for us to put money aside for rainy days and our retirement. As the RSA Tomorrow’s Investor project has shown simple indexation of saving could reduce pension fund fees significantly and make saving safer. And as behavioural economists have shown, speculators – whether private individuals or city whizz kids – rarely perform consistently better then the market as a whole.
If policy explicitly aimed at indexing assets to the overall growth of the economy, and if policies like the CTF and the new pension system increased the proportion of us holding assets, we would all benefit from the country’s prosperity and suffer together when we failed. This sounds good for the economy and good for social solidarity.
Why the Conservatives may be nervous; most of us will be better off in 2009
The state of voters’ finances will affect the Government’s popularity in 2009, but for reasons exactly opposite to those most people assume; on average, families will be much better off in 2009. In fact, this year will be the best for average disposable incomes for almost a decade. Why?
- Pension and benefit increases for 2009 were set at last September’s RPI of 5% but will be implemented with inflation at virtually zero
- Other tax and benefit changes will raise incomes, particularly for families on lower incomes
- Mortgage holders are benefiting from falling interest rates, some families being hundreds of pounds a month better off
- Although annual pay rises will be lower this year, many increases (particularly in the public sector) were agreed when inflation was higher and any, again, even small increases will lead to real improvements in living standards when set against zero inflation
Overall, the modal (most frequent) average improvement in disposable income in 2009 looks like it will be around 5%, a better figure than in any year since Labour took office. What will this mean? There are three broad possibilities. First, we simply won’t notice. Worried about losing our jobs and aware that tax increases are on the way, we may use the extra income to reduce our debts but not feel any better off. Second, the contrasting outcome; there is a general feel good factor which starts to show up in the opinion polls. Third, a phenomenon of which I have written in the past – the contrast between our personal optimism and our social pessimism – will become even more profound. We will blame the Government for the general background of bad economic news but assume that we are personally responsible for our own family finances improving.
The statistic on disposable incomes may also explain why David Cameron has decided to adopt such an aggressive and oppositional stance on the recession, even though, as many commentators have pointed out, the gap between Labour and Tory on policy substance is not as great as the rhetoric suggests. The Conservatives may judge that the biggest danger they face is public contentment in the face of rising average incomes and the possibility of the economy starting to pick up towards the end of the ear. By emphasising public debt and the position of savers Cameron is inviting the public to focus on two indicators that are unlikely to improve whatever happens in 2009.
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