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Friday, June 2, 2017

Could Citizen's Wealth Halt Financial Elite Dominance?

Could citizens’ wealth funds halt the dominance of the financial elite?


The Conservative manifesto pledges to create ‘Future Britain’ wealth funds, and a shale gas fund is under discussion at the Treasury. Is the UK finally waking up to the opportunity such schemes offer for tackling inequality?



The Tories plan to go ahead with extracting shale gas through fracking – but some of the revenue may go into a wealth fund. Photograph: McCaren/LNP/Rex/Shutterstock

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Monday 22 May 2017 09.00 BST
Last modified on Wednesday 31 May 2017 16.19 BST

Tucked away in the Conservative Party manifesto, and largely unremarked, is a promise to create a number of UK sovereign wealth funds, to be called “Future Britain Funds”.

This builds on last year’s proposal in a Treasury Consultation Paper to create a “shale wealth fund” from tax revenue from the extraction, through fracking, of shale gas. Eventually the revenue stream could be significant. The stated aim is to ensure “the benefits of shale developments are shared by communities in which the resource is developed”.

Fracking, of course, divides opinion. Labour, the Greens and many environmentalists want to ban it. The Conservatives have now signalled they plan to press ahead, but with this new twist – that some of the revenue will be socialised for public benefit.

And, it seems, they intend to go further, rolling out the idea of wealth funds more widely, with revenue from additional sources such as the sale of “some public assets”.

The concept of a wealth fund would bring fundamental changes in the way we manage national wealth. Imagine if the UK had had the foresight to follow Norway, Alaska and others in creating an oil-financed wealth fund in the 1980s. If proceeds from the wave of major privatisations since the 1980s had been added in, the UK would today have one or more funds worth upwards of £600bn (bigger than the sovereign wealth funds of Qatar and Russia combined ).

Funds on this scale would have been economically and socially transformative. They could have boosted infrastructure spending without the need to borrow, paid for regeneration in poorer areas, or funded a generous annual dividend paid to all citizens.

Crucially, such funds offer a new instrument for tackling the UK’s extreme level of inequality. They embrace a vital principle: that part of the national wealth should be communally owned, with the returns going to all citizens. Acceptance of this principle would open up the possibility of building model “citizens’ wealth funds” that tackle inequality directly, and help end the way a small financial elite are able to colonise the fruits of growth.

A model fund is a collectively held financial fund, established initially by the state, but wholly owned by citizens and managed independently of government for the public good.

Citizens’ funds tackle inequality directly, and help to stop a small financial elite colonising the fruits of growth

They challenge one of the principal drivers of inequality: the dominance and extreme concentration of the private ownership of capital. In the UK, the wealthiest tenth of households owns 45% of total private national wealth, while the least wealthy half holds a mere 9%. Because of such concentration, the substantial returns that stem from wealth (in dividends, rent and interest ) accrue almost wholly to the already rich.

In contrast to this built-in inequality escalator – what the French economist Thomas Piketty calls a “fundamental force for divergence” – citizens’ funds offer a new counter-force for convergence.

Over time, they would raise the share of all national wealth that is held in common (currently this stands at less than a tenth), ensuring that a growing part of the returns from capital are shared equally among all citizens. Such funds operate like a giant community-owned unit trust, giving all citizens an equal stake in a part of the economy.


‘Up Helly Aa’ festival in the Shetland Islands, which benefit from a citizens’ wealth fund based on annual payments by oil companies. Photograph: Jeff J Mitchell/Getty Images

There is nothing utopian about this idea; the UK already has longstanding and successful (if small-scale) examples. In the 1970s, Shetland Island Council did a nifty deal with oil companies that agreed to pay annual disturbance payments in return for operational access to the North Sea. These payments have been paid into a wealth fund managed for growth by the Shetland Charitable Trust.

“The fund is permanent,” explains Raymond Mainland, its business manager. “To ensure longevity, the fund’s disbursement and investment policies seek to inflation-proof the capital, and only spend income and returns above this level.”

Today this fund is worth almost £200 million; a big sum for a population of 22,000. Over the last 30 years, the returns have funded social projects from new leisure centres to support for the elderly.

Another, better-known fund, the Crown Estate, manages the royal family’s assets – property, land, mineral rights, harbours and half the UK’s shoreline – independently of government on a mix of commercial and social principles. Worth around £13bn, it passed a surplus of £304 million in 2016 to the Treasury.

Both examples are tested, if partial, blueprints for how a fund based on largely physical assets – including what remains of the UK’s publically owned assets, worth some £1.4trillion – could be established in the UK.

There are also several successful and transparent overseas models. The state of Alaska has used its oil windfall to create a “permanent fund” paying a pioneering and highly popular annual citizen’s dividend – as yet uncopied – since the early 1980s.

The giant Norwegian sovereign wealth fund – also funded by oil – was described by The Economist as the “most impressive example of long-term thinking of any western government”, and acts as an “active investor”. The Australian Futures Fund (which may be one of the models for the Conservatives’ proposal) – with an impressive return since launch in 2006 – was funded from the sale of Telstra, the public telecoms giant, and helps fund disability care costs and medical research.

One of the most radical approaches would be to establish a fund through the dilution of existing capital ownership

As well as locking in part of the gains from growth for all citizens, such funds have additional merits. They would inject long-term thinking instead of “jam today” politics, and by ensuring longevity, secure greater equity between generations. And by raising the stake of citizens in economic success, they ensure high levels of public buy-in.

Managed with transparency and at arm’s length from the state, such funds offer a new tool for social democracy and effective reform of full-blooded capitalism. They are a 21st-century alternative to both the top-down statism of old-style nationalisation, and the fashion for rampant privatisation and uncontrolled markets.

By taking established stakes in companies, citizens’ wealth funds could help align the interests of society and business more closely. They should be a central element of any plan to modernise Britain’s current inequality-driving, growth-sapping economic model.

Part of the finance could come from the revenue from natural resource exploitation – from minerals (including shale gas) and land to the licencing of the airways. Other sources could include occasional one-off taxes (paid in shares) on windfall profits, and a direct charge on those financial and commercial transactions – such as merger and acquisition activity – which redistribute corporate wealth upwards.

One of the most radical approaches would be to establish a fund through the dilution of existing capital ownership, paid for by an additional, modest annual levy on share ownership (such a measure was first advocated in the 1960s by the Nobel Laureate, James Meade).

In this way, part of the privately owned stock of capital would be gradually transferred into public holdings. Such a model was implemented in Sweden in the 1980s, and grew to own 7% of the economy before it was closed in 1991.

In recent years, there has been much talk but little action on the need to tackle inequality. Citizens’ wealth funds are a way for political leaders to turn their anti-inequality rhetoric into a real strategy for change.

Source: The Guardian

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