Friday, December 12, 2008

Cutting Off Our Vital Organs

Not an instrument of reform

The Times headline hits the nail on the head: "Armed Services take first big hit in public spending":

"Two programmes worth £20 billion will be cut and delayed after defence chiefs were told that there was not enough money to go ahead as planned.

The announcement throws into disarray the Army’s £16 billion update to armoured vehicles, while the Royal Navy’s £3.9 billion project for two new 65,000-tonne aircraft carriers is postponed for two years."

Defence procurement is always the first casualty of spending war, and in a crisis, governments invariably give British jobs priority over military needs. Lewis Page has an excellent summary:

"Mr Hutton has decided to pour cash into the lame-duck UK helicopter industry and to postpone spending on the Royal Navy's planned aircraft carriers. He has also decided to have a new competition for the Army's vehicles budget, as the last one was won by a non-UK company."

BOM readers will be familiar with the splendid ex-Navy Mr L (eg see this blog), and to non-military types like Tyler he always talks a lot of sense.

Here, he explains how the 2 year postponement of the carriers will end up costing taxpayers even more because "the nature of defence projects is to cost more as they last longer". He also reminds us how the "Buy British" policy applied to the choppers and trucks is little more than pork barrelling, costing taxpayers a fortune, and delivering inferior equipment years behind schedule. On the choppers:

"... we could have ordered Seahawks and Blackhawks instead of Lynxes, getting bigger and more powerful choppers - and ones for which parts and support would be cheaper (the world Seahawk/Blackhawk fleet is huge, offering economies of scale the Lynx will never match). We'd be getting those aircraft right now, and our troops would be very pleased with us right now - not waiting another four years for inferior substitutes which will cost more to run.

We could then give the 900 sacked workers in Yeovil payoffs of half a million pounds each: and we would still have saved nearly a quarter of a billion pounds compared to what we are doing in reality."

Gah! No, I can't take any more of that - read it yourself.

But the main point is that just like the 1970s, Britain is once again entering a prolonged period of public spending cuts. And the lesson of history is that governments are terrible at directing those cuts rationally. Far from eliminating the fat that has built up through the boom years, they end up debilitating large parts of our public services by axing vital investment, and applying the same starvation diet to all organs of the state, irrespective of their importance.

Let's remind ourselves how it works.

First to go is capital spending. As Lewis Page notes, that carrier delay signals their likely axing post-election. And in the Pre-Budget Report, by far the biggest spending cuts in the out-years are in capital spending. There's much more to come, and vital programmes like new prison building will get pushed back for a decade - even though crime is likely to soar in the recession (like we've said before, you need to arm yourself, now).

Second, all departmental spending limits are subjected to a pro-rata haircut. It's simply too hard to get spending ministers to accept larger cuts for their own departments in order to boost some favoured "colleague". Right now, for obvious reasons, both main parties are saying they'll exempt the sacred NHS from that blunt instrument, but trust me, as the haircuts get more severe, other spending ministers will insist on the £100bn NHS taking its "fair share".

And inside the departments themselves, the same logic applies - it's simply too hard to axe whole functions, so everything has to take the same haircut. The commercial banks are now biting bullets all over the place and closing entire operations. But they're been driven by the so-called value imperative - ie the need to make a profit and satisfy their angry shareholders.

Third, public sector pay gets crammed down. Fair enough, you say, given all the pain elsewhere. But remember, public employees are much more heavily unionised than private employees, and as we blogged here, the average public sector worker goes on strike well over 100 times more frequently than his private sector counterpart. Public services crumble in the face of a huge increase in strikes.

You know what? I can't go on with this because I'm depressing myself again.

In theory, an outright necessity to cut public spending is an opportunity - an opportunity to get the public sector in shape. We could eliminate activities that don't need doing (like those notorious Regional Development Agencies, and the rafts of Labour's useless inspectorates), and we could introduce efficiency-raising choice and competition right across our public services.

In practice, it simply won't happen. Politicos of both parties lack the stomach for the fight. Taxpayers pay through the nose on the way up, watching as the public sector bloats itself with huge additional layers of fat. Then on the way down we watch again as vital organs are trimmed off and service standards plunge to new depths.



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