Are free schools really widening choice?

Parents who want a new local school are offered a free school or nothing.

While many in my party are opposed to free schools in principle, I am reluctant to man the barricades on every occasion one is approved. I am sure many of the schools offer a fine education, with nuanced but important variations from the national curriculum that parents think important and children find stimulating and exciting. Nor do I think Michael Gove is the devil incarnate for introducing them – I suspect he is sincerely trying to improve educational standards in the way he thinks is best, even if I don’t agree with all he is doing (by a long shot).

I do, however, question the assumption that the free school movement is all about parental choice. That’s not how it feels to me.

In my own area, Zac Goldsmith hosted a public meeting a couple of weeks ago to tell local parents that the money promised for a new local education authority school had gone down the plughole with the demise of the Building Schools for the Future (BSF) programme – and that the only realistic way in which central government funding would be secured to deliver a desperately needed new school would be if a successful bid for a free school was made. Two other choices were mentioned – to cut £25 million from other local services or to add five per cent to council tax. Neither seemed attractive. Thus the choice on offer appears to be: "it’s a free school - take it or leave it".

After I wrote about this, Zac has tweeted to me that the free school funding option offers more parental choice than under BSF. Again, that’s not how I see it. Under the free school movement, there may well be multiple local applications for a new school – but the choice of which type of school will emerge rests not with parents but with the Education Secretary, who will ultimately decide which sort of school is best.

I’m also concerned that the Lib Dems are being slightly complacent about all this.  Nick Clegg told the Social Liberal Forum conference on Saturday that he had stopped Gove putting free schools "everywhere". I promise you, Nick, if you have, it doesn’t feel like it on the ground.

If parental choice was at the centre of this programme, parents would first be asked if they wanted an LEA or centrally-funded school, before then being asked what changes they would like to see on that school’s curriculum from the standard. But currently, as one councillor said publicly the other week, "I have to have a new school and I’m going to do whatever I have to in order to get it built, even if I end up having to call it ‘The Michael Gove Free School’".

Which would actually not be such a bad strategy when you consider who is actually going to end up making the choice …

Education Secretary Michael Gove at The Royal Courts of Justice to give evidence to the Leveson inquiry earlier this year. Photograph: Getty Images.

Richard Morris blogs at A View From Ham Common, which was named Best New Blog at the 2011 Lib Dem Conference

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Let's turn RBS into a bank for the public interest

A tarnished symbol of global finance could be remade as a network of local banks. 

The Royal Bank of Scotland has now been losing money for nine consecutive years. Today’s announcement of a further £7bn yearly loss at the publicly-owned bank is just the latest evidence that RBS is essentially unsellable. The difference this time is that the Government seems finally to have accepted that fact.

Up until now, the government had been reluctant to intervene in the running of the business, instead insisting that it will be sold back to the private sector when the time is right. But these losses come just a week after the government announced that it is abandoning plans to sell Williams & Glynn – an RBS subsidiary which has over 300 branches and £22bn of customer deposits.

After a series of expensive delays and a lack of buyer interest, the government now plans to retain Williams & Glynn within the RBS group and instead attempt to boost competition in the business lending market by granting smaller "challenger banks" access to RBS’s branch infrastructure. It also plans to provide funding to encourage small businesses to switch their accounts away from RBS.

As a major public asset, RBS should be used to help achieve wider objectives. Improving how the banking sector serves small businesses should be the top priority, and it is good to see the government start to move in this direction. But to make the most of RBS, they should be going much further.

The public stake in RBS gives us a unique opportunity to create new banking institutions that will genuinely put the interests of the UK’s small businesses first. The New Economics Foundation has proposed turning RBS into a network of local banks with a public interest mandate to serve their local area, lend to small businesses and provide universal access to banking services. If the government is serious about rebalancing the economy and meeting the needs of those who feel left behind, this is the path they should take with RBS.

Small and medium sized enterprises are the lifeblood of the UK economy, and they depend on banking services to fund investment and provide a safe place to store money. For centuries a healthy relationship between businesses and banks has been a cornerstone of UK prosperity.

However, in recent decades this relationship has broken down. Small businesses have repeatedly fallen victim to exploitative practice by the big banks, including the the mis-selling of loans and instances of deliberate asset stripping. Affected business owners have not only lost their livelihoods due to the stress of their treatment at the hands of these banks, but have also experienced family break-ups and deteriorating physical and mental health. Others have been made homeless or bankrupt.

Meanwhile, many businesses struggle to get access to the finance they need to grow and expand. Small firms have always had trouble accessing finance, but in recent decades this problem has intensified as the UK banking sector has come to be dominated by a handful of large, universal, shareholder-owned banks.

Without a focus on specific geographical areas or social objectives, these banks choose to lend to the most profitable activities, and lending to local businesses tends to be less profitable than other activities such as mortgage lending and lending to other financial institutions.

The result is that since the mid-1980s the share of lending going to non-financial businesses has been falling rapidly. Today, lending to small and medium sized businesses accounts for just 4 per cent of bank lending.

Of the relatively small amount of business lending that does occur in the UK, most is heavily concentrated in London and surrounding areas. The UK’s homogenous and highly concentrated banking sector is therefore hampering economic development, starving communities of investment and making regional imbalances worse.

The government’s plans to encourage business customers to switch away from RBS to another bank will not do much to solve this problem. With the market dominated by a small number of large shareholder-owned banks who all behave in similar ways (and who have been hit by repeated scandals), businesses do not have any real choice.

If the government were to go further and turn RBS into a network of local banks, it would be a vital first step in regenerating disenfranchised communities, rebalancing the UK’s economy and staving off any economic downturn that may be on the horizon. Evidence shows that geographically limited stakeholder banks direct a much greater proportion of their capital towards lending in the real economy. By only investing in their local area, these banks help create and retain wealth regionally rather than making existing geographic imbalances worce.

Big, deep challenges require big, deep solutions. It’s time for the government to make banking work for small businesses once again.

Laurie Macfarlane is an economist at the New Economics Foundation