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Referanda to the rescue?, Waiting for Whately and actioning ESG

Policy preview: referanda to the rescue?
Planning reform has long been seen as a bugbear for the Conservative Party. Even the current government, with its 80-seat majority, has faced calls to water-down its proposals in the aftermath of June’s Chesham & Amersham by-election attenuated concerns that housing reform could erode support from the traditional Conservative base, homeowners.

The Labour Party has attempted to seize on this, arguing that Prime Minister Boris Johnson’s tax increase puts the burden to fund social care on workers rather than on homeowners. Nonetheless, we noted in our 23 June Horizons newsletter that we expected Johnson to push ahead with the core of these reforms despite that shock result with the Liberal Democrats overturning a 16,000 majority.

Johnson and Housing Secretary Robert Jenrick, however, have faced grumbling from the backbenches, including from former prime minister Theresa May over the planning reforms. Yet some of these same backbenchers may have picked up on a solution that allows Johnson to avoid risking a major rebellion. MPs are expected to introduce a private members bill that would give local communities a vote on housing in their area, including approving density plans and style guides.

The policy, known as ‘Street Votes,’ is the brainchild of the Policy Exchange and Create Streets think tanks and aims to challenge the perception that new developments are aesthetically, and economically, unpleasing to suburban residents while also enabling those rural residents to protect green spaces even when their local authorities aim to increase the housing stock.

Whether such a policy could be successful remains to be seen. Advocates such as Sam Bowman of the US’ International Center for Law and Economics argue that it provides the optionality necessary to have a ‘bottom-up’ approach while allowing the political hurdles, at both a parliamentary and local level, to be overcome by residents keen on raising the value of their neighbourhood. They point to similar proposals in Seoul and Tel Aviv that saw new housing approvals jump by as much as 50%.

Incorporating the Street Votes proposals into the government’s own legislation may well bring it sufficient votes to avoid a substantial rebellion. It may also bring in some Labour votes for Johnson’s housing plans and planning reforms, a situation Johnson has thus far been keen to avoid least he be seen to be dependent on Labour votes to pass them.

The Smart Votes system remains untested, and it will seem unnatural to many UK political observers that referenda, even of the hyper-localised variety, could be the panacea to some of its mot lasting political disputes. Politically, however, it offers the Johnson government the potential to declare victory on passing its reforms while deflecting responsibility for any eventual housing -target shortfall.

“Maybe this referendum will be the beginning of a trend” Former UKIP and Brexit Party leader Nigel Farage

Power play: waiting for Whately

The UK government is staking a great deal of political capital on its recently announced reforms for adult social care. Prime Minister Boris Johnson has gripped the ‘third rail of British politics’ by trying to tackle the issue, but the government could be damaged if the controversial policy is a damp squib.

Helen Whately, Minister for Social Care, will be responsible for driving and delivering the reforms. Funded by a rise in national insurance contributions and dividend taxes raising £12bn annually, the government will initially attempt to clear the pandemic-induced NHS backlog.

After three years of increased funding for the NHS, the extra cash will supposedly be diverted from the NHS and re-allocated to the social care system. If, of course, reducing funds to the NHS doesn’t prove too politically challenging.

With a political bid to prevent care users needing to sell their homes or other financial assets to fund their social care, the government has proposed a (means-tested) cap on the lifetime costs of social care of £86,000 from October 2023.

However, it is not yet clear exactly how or why the reforms will make the social care system. The political difficulty that has surrounded the issue for decades has largely been a matter of funding, and it is this area that was covered in most detail by last week’s announcement

There is still more to come in the way of solutions for how the government plans to tackle some of the underlying problems that the social care sector faces. Identified in Department for Health & Social Care’s white paper this February, these issues include insufficient integration with the NHS, too much bureaucracy and a need for more accountability in the system.

The government’s new plan includes provisions for more training and support for care workers, but detail on how it will address these issues is thin on the ground, with another white paper setting out further detail promised in due course. Social care providers such as Four Seasons Health Care have already criticised the plan as being too little too late, calling on the government to make the necessary reforms to help support staff as soon as possible.

Though the reforms have not been universally popular, they have not torpedoed the Conservative’s polling in the manner that Theresa May’s social care proposals did in 2017. Once the impact of NIC increase starts to bite, pressure will be on for the government and for Whately to show that their reforms are having a real effect.

“We have a social care crisis right now, and it can’t wait to for people to draft [a promised white paper], and then delay any funding and any staffing changes for another two years.”

Jeremy Richardson, Four Seasons Health Care CEO

Dollars and sense: actioning ESG
It is not too often that international bond markets have to think about NGO’s. That is not to say it is unprecedented for them to do so – 25 years ago the International Monetary Fund and World Bank launched the Highly Indebted Poor Countries (HIPC) initiative following sustained pressure from the Jubilee Debt campaign and associated activist groups. HIPC today remains a key structure of emerging market debt markets, enabling many more countries, including debuts well into the bottom rungs of the credit rating spectrum, to issue international debt.

The sale of so much debt by low-income countries and companies in poorly regulated markets has often raised concerns about how they should be treated for investors seeking to put climate change concerns and environmental, social and governance (ESG) principles at the heart of their investing strategy. The credit investment industry is being slowly transformed by ESG investing, with so-called ‘green bonds’ now often trading at a premium. This makes green debt in theory cheaper, and therefore a market structure to promote the very ESG principles they encompass.

However, concerns about ‘greenwashing’ remain. If the recent trend for ESG investing does translate to a sustained premium, this risks major losses for creditors holding debts that are later revealed not to be as rooted in ESG as initially premised.

Given that similar concerns about morality in investing and the potential for economic growth to be more equitable globally prompted the HIPC initiative – which enables countries below a certain income level to receive special assistance from the IMF and World Bank – it is not too surprising that once again the voices of NGO’s are being heard on ESG investing.

Already there is evidence that they may be having an impact. In March of this year, the Nature Conservancy announced it was launching a programme to work with coastal nations to protect their waters, ‘Blue Bonds for Ocean Conservation’. The effort attempts to combine the twin realities that it is difficult for maritime nations to resist exploiting their waters’ wealth with the reality that debt countenancing ESG principles is cheaper for issuers.

The Nature Conservancy said that it was inspired to launch the programme by work it had done with the Seychelles government to restructure $22 million in its debts in 2016, but it is now set to face its first major market test. The government of Belize has announced its intent to restructure its debt – following two defaults in recent years – in a deal backed by the Nature Conservancy and its key creditors. Under the Blue Bonds programme, Belize will repurchase $530 million in dollar bonds for just over US$290 million. Investors see a gain to the 60% discount the debts had been trading at, while Belize reduces its debt burden substantially. In exchange it agreed to fund a $23.4 marine preservation endowment and the new debt provided by Credit Suisse to finance the repurchase will be subject to Belize continuing to honour certain ESG commitments. The deal has until 19 November to be approved by 75% of bondholders.

Bringing together international institutions, NGOs and bond markets proved an effective way to fund emerging markets growth with the HIPC initiative. The Nature Conservancy programme may just have established a template for ensuring that ESG principles remain a sustained, not fleeting, feature of funding this growth.

“A debt is just the preservation of a promise” David Graeber, Author of Debt: The First 5,000 Years

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Boris’ social test, raise the roof and potash play

Policy preview: Boris’ social test
“Providing better social care for older people who need it is a cause worth fighting for” Ex-prime minister Gordon Brown

Prime Minister Boris Johnson marks two years in office come 24 July – regardless of potentially partisan views on how he performed on them, there is little disputing that he has faced a series of serious tests to his leadership: Brexit and the COVID-19 pandemic foremost among them. However, seems to have yet another test. As laid out in the Queen’s Speech this May, the government plans to lay out proposals on social care reform in this Parliament.

It will be the first time the Conservatives have seriously put forward such proposals since then-prime minister Theresa May included in the party manifesto a policy that would see the government claw back some spending on elderly care from the value of the home. It was stingingly, and lastingly, labelled a ‘dementia tax’. The policy – or at least the attention it received, its justification by critics to label May as ‘cold,’ and, perhaps most importantly, the unease it caused with homeowners, arguably the key Conservative constituency – was seen as critical in the loss of the Conservative majority in the June 2017 general election.

One can be certain that Johnson will not be reviving May’s policy, from which she was forced to backtrack during the campaign. There has been little attention to just how high a pedestal Johnson has placed on such reform even as he made its priority quite clear by declaring that “We will fix the crisis in social care once and for all” outside Downing Street on his first day as prime minister.

Spending on social care remains well below its 2011 levels, and while the Conservative Party is expected to return to its budget-conscious roots more broadly, this is one area where even libertarian-inclined Conservatives such as Jacob Rees-Mogg have endorsed further investment. Having turned on the spending spigot to fight COVID-19, which has raised the political weight of public health and wellbeing issues significantly, Johnson may well feel justified to do so with regards to elder care. The political push for such action may grow as claims by Johnson’s former advisor, Dominic Cummings, that Health Secretary Matt Hancock saw COVID-19 patients returned to care homes without negative tests are investigated.

Johnson has been cool on a mandatory-contribution scheme to fund such care in the past, and is likely to again hold off now. A blank cheque pledge from the state to meet all social care costs is also unlikely, but Johnson is clearly not afraid of being seen as a statist. Expect his proposals to include substantial investment in state-run social care, and an entitlement to certain levels of in-home support, with the state overseeing a regulated system of insurance-style schemes available to those over a certain age limit. To make them more attractive, tax advantages are likely to be offered to buyers.

Dollars and sense: potash play
“Our country has become a conduit for security and stability in the centre of Europe” Belarusian President Alexander Lukashenko

The European Union is going to impose its most serious sanctions yet on Belarus, following a meeting of the bloc’s foreign ministers at the end of May. Outraged by Minsk’s tactics in arresting an opposition journalist – apparently calling in a fake bomb threat to a Ryanair flight from Greece to Lithuania, both EU members, to forced the plane to divert to Minsk – the ministers agreed to punish strongman ruler Alexander Lukashenko by sanctioning key industries in the country, where most businesses are still state run. According to Luxembourg’s foreign minister, this is to include potential sanctions on its exports of potash, a mined fertilizer that is the sole natural resource Minsk produces in abundance.

Washington has been more circumspect, although it typically imports fairly little potash from Belarus, with sizable North American producers such as Canada’s Nutrien and US-based Mosaic rivalling Belarus’ state-run Belaruskali among the world’s largest producers. Washington is concerned such a move could push Minsk into an even more reliance on Russia, its key benefactor, and also increase Europe’s resource dependency on Russia given its largest alternative potash sources are all Russian. Nevertheless, US Secretary of State Tony Blinken has made coordination of sanctions policy with Europe a key policy priority and will not oppose any such move.

There is precedent for sanctions on key commodity producers to rile markets, with the most recent such example the 2018 sanctioning of Russia’s Oleg Deripaska, which risked affecting his metals firm Rusal, causing major tumult on aluminium and bauxite markets as prices spiked overnight. A similar situation is less likely to result if the EU blacklists Belaruskali or otherwise seeks to restrict its ability to sale in the EU market because potash spot markets are not nearly as important to the trade, and pricing outlook, of potash.

Belaruskali, however, itself is very significant in setting potash prices because for much of the last decade it has traditionally agreed annual supply contracts with China and India before any other competitors that are seen as setting the ‘price floor’ for the market. Western sanctions on Belarus could see Minsk accept a bottom barrel price next year. Responding to Minsk in this manner may inadvertently pull out the proverbial rug underpinning the profitability of other potash producers as well.

Power play: raise the roof?

“I always think a debt ceiling is a good tool to carry something”

Senator Mith McConnell, Republican Minority Leader

Fights over the US debt ceiling – a legal limit on how much the federal government can borrow – were a key feature of domestic American politics for much of the Obama presidency. The downgrade of the US’ credit rating in August 2011 set off a round of political fighting that repeated itself every year, with fiscally Conservative Republicans seeking to constrain president Barack Obama’s budgets, and spending on his flagship health care agenda, throughout his term in office. As deficits continued to grow under the Trump Administration – with federal revenues falling due to his flagship legislation, tax cuts – debt fights slowly faded from the agenda. In 2019, Congress passed a mechanism tying the debt ceiling increase to the budget, aiming to settle the matter once and for all.

2020 quickly put paid to that plan, with the massive deficit and in turn debt increase caused by the trillions of dollars in stimulus both the Trump and Biden administrations have put at the core of their response to the pandemic. Congress did agree to suspend the debt ceiling last year, but that suspension expires on 1 August. With the Republicans in opposition in Congress, a renewed debt fight is to be expected. Lawmakers such as Senators Ted Cruz (R-TX) and Lindsay Graham, (R-SC) have already floated potentially policy concessions from the Biden Administration in exchange for their support.

However, the lawmaker most set to benefit from the debt battle is not a Republican, but rather Arizona’s Krysten Sinema, arguably the sole budget-wary Democrat remaining in the Senate. Because debt ceilings can be tied to the budget, the Senate’s ‘Byrd Rule’ applies, which allows a simple majority to pass legislation. With the Democrats holding 50 Senate seats, and Vice President Kamala Harris the tie-breaker, Democrats could adjust the debt ceiling without any Republican votes.

However, centrist Joe Manchin (D-WV) has demonstrated the political rewards on offer by threatening to be the sole holdout. Less than five months into the Biden presidency, he has arguably become the most powerful figure in the Senate. This not only helps him not only secure benefits for West Virginia but also to maintain his political position in the state, which voted overwhelmingly for Trump, given his perceived independence from the Democratic agenda.

Sinema’s home state of Arizona is, in contrast, a key swing state. She will threaten to hold out to seek political benefits there as well, hoping it solidifies her support among centrists ahead of her re-election campaign in 2024 when Arizona is again expected to be among the most contested states. Ultimately, however, she will support such an increase, likely extracting some directed spending towards Arizona in the process.

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