Is Chris Grayling running scared of Margaret Hodge?

Justice Secretary accuses the chair of the Public Accounts Committee of "political grandstanding" after her committee described the performance of the Work Programme as "extremely poor".

Margaret Hodge, the redoubtable chair of the Public Accounts Committee, appears to have touched a nerve. In an interview on BBC Radio 5 Live Pienaar's Politics last night, the Justice Secretary, Chris Grayling, accused the Labour MP of "political grandstanding" and of failing to take "a proper and dispassionate view of her job".

It's unusual, perhaps even unprecedented, to hear such strident criticism of a select committee chair from a minister, so what could have provoked Grayling's ire? The answer is last month's Public Accounts Committee report on the Work Programme, for which he was responsible while employment minister. The scheme's performance was described by the committee (which has a Conservative majority) as "extremely poor", with only 3.6 per cent of claimants moved off benefits and into sustained employment. 

This success rate was less than a third of the DWP target of 11.9 per cent and even below the official estimate of what would have happened if the programme had never existed, prompting the famous claim that it was "worse than doing nothing". Not one of the 18 providers, such as A4e, Ingeus, REED and G4S, managed to meet its minimum performance targets, with the best provider moving five per cent of claimants into work and the worst moving just two per cent. 

And it is those most in need of help who are failing to get it. As Hodge noted, "of the 9,500 former incapacity benefit claimants referred to providers, only 20 people have been placed in a job that has lasted three months, while the poorest performing provider did not manage to place a single person in the under 25 category into a job lasting six months." Given the extent of the failure, Grayling was warned that there is a high risk of one or more of the providers going bust, or having its contract cancelled. "The Department must identify cases where a provider is at risk of failing and ensure there are specific plans in place to deal with this," the MPs said. 

Confronted by these uncomfortable truths, it's unsurprising that Grayling feels the need to lash out. But his discomfort is merely evidence that Hodge is doing her job: holding the executive to account for their use of taxpayers' money. While Grayling claims that the scheme, which pays providers by results, represents better value for money than the last government's Future Jobs Fund, this claim rests on a generous interpretation of the data. 

Ministers boast that the cost of every job secured under the Work Programme is just over £2,000, compared with a cost of almost £7,500 under Labour's scheme. But as Alex has previously noted, this takes no account of the fact that had the programme not existed, there would have been an extra 14,000 jobs created. As he concluded after crunching the numbers, "the Work Programme did not cost £2,000 per job. Instead, for every £4,600 it spent, it destroyed one participant's chance of employment."

The government points out that the orginal performance targets were set when growth was expected to be significantly higher than it is now. But given that the IMF, the National Institute of Economic and Social Research and others argue that the excessive pace of austerity is at least partly to blame for this, it's not clear why it regards this a legitimate excuse.

Rather than impugning Hodge's integrity, Grayling would do better to develop a Work Programme that actually works. 

Margaret Hodge, the Labour MP for Barking and the chair of the Public Accounts Committee. Photograph: Getty Images.

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