Robert Peston - inside out

Robert Peston - inside out - Globalisation must be one of the world's most hateful words. With its almost religious significance for management consultants, it is often used to obscure rather than enlighten. Tony Blair, in his normal guise as politician c

by ROBERT PESTON, editorial director, Quest
Last Updated: 31 Aug 2010

Globalisation must be one of the world's most hateful words. With its almost religious significance for management consultants, it is often used to obscure rather than enlighten. Tony Blair, in his normal guise as politician cum slightly dodgy consultant for UK plc, has peppered all his speeches and interviews with it for more than five years.

Yet it is, sad to say, a powerful concept. And Blair was astute to invoke it when repositioning Labour away from its historic attachments to high taxation and high public spending. The point is that, in a world of mobile capital and labour, governments must conform to conservative international convention in setting economic and industrial policies or risk a flight of investment and talent.

But for all Blair's rhetoric, it is not clear that he understood the implications of his own sales pitch. He grasped what Denis Healey learned more than 20 years ago when presiding over wholesale economic crisis: that the markets punish imprudent spenders and borrowers. But he and chancellor Gordon Brown seem to have only belatedly recognised that their room for manoeuvre on micro-economic initiatives - everything from minor tax changes to the imposition of social obligations on companies - is also limited.

The painful fact is that if businesses can escape their burdens by relocating to another stable economy, they will. And if talented business people or scientists or artists can earn the same gross income abroad but pay less tax, they'll go abroad.

This kind of mobility was much talked about five years ago, especially by grasping company boards defending the award of over-generous pay packages to mediocre executives. But until recently the international market in top people and high-growth businesses did not really exist.

In today's world of converging technological platforms and homogenous consumer tastes, markets for people and products really are global. The hi-tech businesses on which Britain's prospects depend - companies such as Autonomy or ARM or Psion - can just as easily function out of the US or Sweden as the UK.

Blair and Brown's two most embarrassing economic policy mistakes - imposing national insurance contributions on share option schemes and a crackdown on dividend-mixing by multinationals - came from a failure to see the impact of their plans on businesses with an international orientation.

The prime minister has conceded this to business people, but does he appreciate the significance of his u-turns? In both cases, the government was forced by global market pressures to modify measures that were justified on grounds of fairness, a concept much better understood by Labour voters than globalisation.

It was never 'fair' that some multinationals have been able to pay less tax than other companies by exploiting a device to offset tax payments made in high tax regimes against those in lower tax regimes. But trying to abolish this dividend-mixing system brought credible threats from large and important companies that they would move their domiciles to one of the many economies where such arrangements are allowed.

The compromise offered by the Treasury, permitting dividend-mixing subject to new limits, was inevitable - especially since Blair is desperate to stave off the day when successful business people redirect their affections to the Tories.

Nor was it 'fair' that companies operating largely in the hi-tech industries were able to give share options in lieu of more generous salaries to their staff and thus avoid NI payment on the option awards. However, imposing this liability put a burden on these growing businesses that their rivals in San Francisco did not have. So again the Treasury had to amend the proposal, in the face of warnings to the effect that new economy investments would bypass the UK.

Meanwhile, it is not just economic policy-making that is being constrained by globalisation. The prime minister has been discomfited by criticism of the government's e-snooping or RIP bill - allowing the security services to tap e-mails - for putting the UK's internet businesses at a disadvantage compared with foreign rivals. He has made little attempt to justify the measure, which bodes ill for its sponsor, home secretary Jack Straw.

The tension between fairness and globalisation is the biggest problem for Labour. Governments of all shades recognise that globalisation makes their work more boring as ministers become salaried managers directed by global forces. Big political initiatives are harder to find because daring policies risk being at odds with the global norm.

For Labour, where an attachment to fairness is almost all that is left of its socialist tradition, the problem is acute and a new Treasury team has been asked to investigate how equity and globalisation can be reconciled. Building Jerusalem as an island in a digital world will not be easy.



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