A Capital Idea - turning nominal ownership into real ownership

A stakeholder is generally taken to be someone with an interest in a concern, or someone affected by it.  Very often it is used to denote those who do not own a business but are in some way affected by its actions and its outcomes.  In addition to the shareholders and directors of a company, several others are involved in what it does and can be called stakeholders.  This can include creditors, employees, suppliers, and the community in which the business is located or from which it draws its resources.  The term is a loose one, but it is generally taken to indicate those who do not literally own a stake in the business, but who nonetheless feel its impact on their lives.

The term is often used politically, in that its users acknowledge that the stakeholders do not control the actions of a company and have no say in its decision-making process, but urge that they should have.  They sometimes advocate that stakeholders should have the right to be consulted and should have some say in the decisions that affect them.

Citizens of the United Kingdom can be said to be stakeholders in the country, in that they are clearly affected by what it does.  They do have a say of sorts in the decisions that affect them if they exercise their right to vote in Parliamentary or local government elections.  This say, however, is a loose one in that they vote for a bundle of policies, many of which are loosely expressed as intentions rather than detailed proposals for a plan of action.  And most UK citizens do not literally own a stake in their country, one they can use for their purposes.

Herein lies one of the problems faced by the poorer section of the population.  They have no capital.  Most of the poorest third have negligible assets outside of their few personal possessions.  They have nothing to draw on, nothing to borrow against, nothing to tide them over during hard times.  Most of them live precariously from hand to mouth, worrying whether their income, drawn from whatever sources, will meet their outgoings.  They struggle to get through to their next payday, and some are reduced to short-term borrowing at punitive rates of interest.  They have to budget carefully, knowing they cannot afford costly items.  Some struggle to make sure their children are adequately fed and clothed.  Many have to scrimp as the end of the month approaches, sometimes falling short of what many would regard as a decent living standard.

The problem is that most of them have no reserve.  Their income is entirely used up in day to day living.  They have no margin to set aside for saving against unexpected emergencies or even harder times.  They might be described as stakeholders in their country, but they have no tangible stake, nothing they can call their own, nothing with their name on it, nothing they can use when they need help to get by.

Most people think in terms of poor people being helped by welfare, by giving them access to additional sources of income such as housing benefit or income support or the many other benefits that are available to those who understand the system.  The problem is that the welfare system is built up of a myriad of overlapping benefits with complex rules for qualification.  It is by no means user-friendly, although its complexity and opacity is ameliorated to some extend by charities which specialize in helping poor people to surmount the benefits hurdle.

A further problem with welfare income lies in two forms of poverty trap.  One is that the welfare income is itself a disincentive for people to go out and make every effort to gain paid employment instead.  The other is that when outside income is earned, the benefits are reduced, making the extra effort to be self-supporting hardly, if at all, worthwhile financially.

Many of the poorest third are working poor, trying to get by on low wages, and while welfare payments can undoubtedly help some of them to get by, they do nothing to solve the basic problem of a lack of capital.  Transfer payments may enable them to make ends meet, but they very rarely allow for any saving.  The welfare system is designed to give people sufficient income to meet their needs, not to build up a capital reserve.

A novel alternative approach would be to concentrate on allowing poor people access to capital as well as to wage and welfare income.  The nation has a huge stock of capital which is nominally owned by the public but to which the public does not have access.  This includes a large stock of land and buildings, plus some businesses which the state owns wholly or partly.  This capital stock belongs to the nation, which means it belongs to its citizens.  The problem is that those citizens cannot do anything with it, even though it is held in their name.

'Public ownership' is largely a fiction, since the public cannot enjoy any of the rights of ownership.  Someone who owns property can decide how it is to be used, what is to be done with it, and who shall have access to it.  None of this applies to public ownership.  Furthermore, someone who owns private property can alienate it.  They can sell it, give it away or trade it.  They can use it, if they wish, as collateral and borrow against it, using it as security for a loan.  None of this can be done with anyone's share of what is supposed to be owned by the public.  No-one can sell their share of it or transfer it to someone else.  They cannot borrow against it.  It is theirs in name only because they enjoy none of the rights that apply to private ownership.

When British Airways, to give but one small example, was publicly owned, every citizen theoretically owned a small part of it.  The problem was that they could not transfer that part to anyone else, or sell it or use it as collateral.  They could not even say how it should be used.  When it was privatized many people opted to buy shares in BA and become part owners of the now private company.  The difference was that they could now exercise the rights of ownership, including the right to sell their piece of it, something they could never do when it was held by the state in their name.

Instead of saying that citizens each have a small stake in the nation's capital assets, a meaningless stake that is of negligible personal value to them, they should be assigned an actual stake over which they can exercise ownership rights. 

The process begins with an inventory of UK national assets.  A recent count put their value at £1.3 trillion.  This, if the figure were correct, would put each citizen's 'share' at over £20,000.  It is almost certainly an under-estimate.  A Treasury Commission should set about classifying and counting all national assets.  They should be put in the order in which they might be realized.  Land, for example, is among the most disposable, and should be high on the list.  Estimates put land ownership by the Ministry of Defence alone at in excess of 1 percent of all land in Britain.  State land, when sold, could be put on sale with full development rights granted in advance to enhance its value.  Buildings form a large part of that inventory.  It is normal for businesses to rent office space rather than owning it, and the same policy could apply to government.  It could rent the space needed for its activities, and realize the capital value of many of its buildings to distribute to its citizenry.

Obviously there are some assets that would be difficult to sell, and some that should not be sold at all, but that still leaves space for a huge sale to take place over the years, with tranches of state assets being disposed of systematically.  That sale could transfer capital nominally owned by the public into capital actually owned by people individually, and would take a huge step towards solving the lack of capital that gives the poorest in the economy no reserve or cushion, and no fund towards their eventual retirement.

When the government of post-Communist Czechoslovakia (as it was then) embarked upon a programme of mass privatization, it began by distributing vouchers to its citizens.  As companies were systematically put onto the market, those vouchers were convertible into actual shares.  Before that they were, in effect, promises of shares.  A similar scheme could be used during the transfer of shared national assets into individual personal accounts.

Each citizen would have an account opened for them, and into that account would go vouchers designating their share of each tranche of assets.  When the sales gradually took place over the years, the appropriate voucher would be converted into actual shares in the various assets. 

When Sweden privatized its state pension into private funds, each citizen was given a choice between several competing fund managers.  Those who made no choice were assigned into a default fund manager, one that exercised a relatively more cautious investment strategy.  (Following the Financial Crisis post 2008, the default fund manager actually achieved better returns than the others because it was less exposed to equities).

This model would be a good one for the UK to follow in its disposal of state assets.  Each citizen would be given a choice between a number of fund managing providers – Sweden chose six with the default as a seventh, and the UK might choose a similar number.  Each citizen would be given time and information before making that choice, or choosing not to make one, or neglecting to make one.  The providers would invest their clients' funds in a variety of asset classes, and would report monthly to their clients with the balance in their accounts.  The mix of permitted asset classes would be decided by an industry-wide body, and would allow considerable flexibility between providers.  This would give the public choices as to the degree of risk they were prepared to tolerate in pursuit of higher returns.

As the asset disposals took place, equal shares in the proceeds yielded by each tranche would replace the vouchers in each account.  People would thus see the amount in their account grow steadily over the years.  They would be required to hold the capital in their accounts for a set number of years, and a part of it should be kept in the fund until retirement.

The funds would accrue through capital growth and dividends, and none of this growth would be taxable.  If people wished to pay other amounts into their fund, they would be able to do so, indeed encouraged to do so, but this would be done from taxed income.  These additional payments, like the transfers from state asset sales, would generate untaxed growth within the funds.

Others might be encouraged to pay sums into the accounts of others.  Parents and grandparents might want to put funds into children's accounts.  This would be from taxed income, and any growth such funds accrued in the recipient's account would be untaxed.  While Inheritance Tax persists, the government might put limits on the amounts that could be thus transferred, in order to prevent people using it just to escape the tax.  Or it might simply follow the present rule for gifts and have tax liability taper to zero if the donor lives for a further seven years after the gift.  The hope is, though, that Inheritance Tax will have been abolished, along with other taxes on capital.  If the aim is to create a capital-owning society, it makes little sense to tax it.

One great advantage of creating capital accounts for citizens from the sale of state assets is that it creates a flexible system that can be adapted for other worthwhile purposes.  The primary and most obvious one is that they can become fully-funded retirement accounts, resembling to some extent those which most people own in Chile.  People could pay a percentage of their monthly salary into their fund, with employers making a contribution, too.  For the poorest group with no surplus income to spare each month, a personal contribution would not be an option, but an employer contribution could be.  Similarly the government itself could pay contributions into the funds of those unable to contribute themselves.  This could ensure that the accounts of unemployed or disabled people would receive contributions on top of the receipts from state asset sales.

These citizens' accounts could even be adapted to make provision for future health needs along the lines of Singapore's Health Savings Accounts.  This would assume at some stage that a major overhaul of the structure of the National Health Service might be required, one that involves more people choosing to fund private medical treatment for some conditions.

They could even be used to fund higher education, and might be found more attractive and more viable than the loan scheme currently in place.  The point about them is that they are flexible.  Capital can be deployed for a variety of purposes, depending on individual preferences.  The accounts would have a similar flexibility, allowing individuals to exercise their priorities and preferences.

By giving capital funds to everyone, they would provide something which the poorest third a currently lacking – a capital pool that grows over time and could provide a cushion against some of life's contingencies.  Each account would be the property of the owner.  Instead of dying with them as many pensions do, it would be a heritable asset whose full value could be passed on to their children or to other heirs and successors.

Some of the funds could be withdrawn after a set interval, so the funds could be used as collateral for loans.  They would give people the option of leaving the funds to grow within the account, or of taking out part of them for other purposes such as setting up a small business.  They give flexibility; they give choice.  They also give a considerable degree of independence from government.  They give the poorest section of the population access to some of the security and the opportunities presently enjoyed only by those higher up the socio-economic scale.  An important feature would be that funds withdrawn from these accounts would not be taxed.  The capital in them is comprised of funds from the sale of state assets which nominally already belong to the people, and from extra inputs made into them from already taxed income.

From the government's point of view, a scheme of private capital accounts such as these would enable it to use the assets currently held in the state's hands in order to reduce the increasing burden which continued state dependence by a large part of its citizenry will impose on its future budgets.  It is a scheme that would transform publicly owned assets into assets actually owned by members of the public, and in doing so would empower them to have more choices and more chances in their lives.