Johnson fires another warning shot at Miliband

Shadow chancellor calls for major reform of the Labour leadership voting system.

Having elected Ed Miliband as leader less than two months ago, now may seem an odd time for Labour to re-open the debate over its arcane voting system. But that's what the increasingly outspoken Alan Johnson has done. He tells the Times (£): "I would like to see a full one-member one-vote system for leadership contests. At the moment it can be one-member four votes and that's wrong."

Had Johnson's man won (he was a key supporter of David Miliband), one suspects that he may not be so preoccupied with the rule book. But, regardless of his political motives, he makes a convincing argument. As I've pointed out before, the party's tripartite electoral college (divided between MPs/MEPs, party members, and affiliated trade unions and socialist societies) means that some votes are worth significantly more than others. The vote of one MP is worth the votes of 608 party members and 12,915 affiliated members. The vote of one party member is worth the votes of 21 affiliated members. The electoral college system puts Labour out of step with the Tories and the Lib Dems, both of whom elect leaders using a one-member-one-vote system. It would be a mistake for Labour to adopt this system in its purest form; it is both just and necessary for affiliated trade unions, as the founders of the party, to have a say over the leadership. But the extraordinary power held by the PLP can no longer be justified.

There's also no reason to think that Miliband wouldn't be sympathetic to reform. Liam Byrne, who is overseeing Labour's policy review, says that he now expects the party's leadership rules to be "on the table" in discussions. But what's troubling for Labour's leader is that some of those calling for the system to be reformed are, in effect, declaring his election illegitimate. Simmering resentment at the fact that Miliband wasn't the choice of party members and MPs has burst into the open. Alan Milburn and Margaret Hodge both call for the party to deprieve the unions of a say in the leadership election, without whom, of course, Miliband would not have won. Meanwhile, David Blunkett and Charles Clarke issue some of the strongest criticisms we've heard of the Labour leader.

"The problem for Ed is that he got dipped in the Gordon paint pot," says Blunkett. Clarke comments: "Ed Miliband is back to the comfort zone. I don't think he's 'Red Ed' particularly but he hasn't so far shown that he's into challenge." Of the above, Clarke and Milburn are, of course, no longer MPs. But the fear for Team Miliband is that they speak for a significant Blairite constituency in the party. As Dan Hodges reports in this week's magazine (out today), sections of the party remain in a state of unease and unrest following Miliband's repudiation of New Labour.

One shouldn't exaggerate the dissent we're beginning to hear. After all, by historical standards, the Labour Party remains remarkably united. But it looks like Miliband will have some firefighting to do when he returns to Westminster.

George Eaton is political editor of the New Statesman.

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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