Sunday, November 30, 2008

News From BOM Correspondents - 10


Recent news and links:

Council Tax

We're approaching that time of year again, and BOM correspondents are spotting some worrying signs.

Mr Brillo sends news from Telford, where despite an inflation busting 5.35% increase in their central government funding for next year, and the general deflationary environment, and the drop in VAT, the council is still intending to increase council tax. The council reckons it is "impossible for us not to raise council tax".

Mr B is understandably fuming, pointing out that:

"...this is the council that insisted that Penguins couldn't enter the public park without a CRB check and risk-assessment, and that targeted single men sitting eating lunch on the park benches, demanding to know why they were alone (see previous blog here). And they keep wringing their hands over town centre parking fees and telling people to go green or cycle, but that all council staff have free parking right next to their offices."

He should clearly vote for a Tory council.

Oh, Telford is a Tory council.

As is Ealing council, although evidently that hasn't stopped them wasting cash. KM highlights Around Ealing, yet another of those glossy local council puff mags, which reportedly costs £100 grand pa. He also picks up the ParkSmart leaflet (pic above):

"Over the equivalent of 4 sides of A4 this tells you how and where and when you may park your car and what all the associated road markings, signs etc. mean. This has been, I assume, delivered to every household in the borough! At what cost? Who knows? And since when has it been the local council’s job to educate the great British motorist about the Highway Code? And to do so regardless of whether I need to know – I don’t because I don’t drive! If I did drive, wouldn’t I have needed to know all this to pass my test?"

Gah!

But at least one council will be cutting council tax next year. Tory Hammersmith and Fulham will be cutting by 3%, the third year in a row of lower tax. How?
"More than £13 million of red tape is being cut in 2009/10 by reducing staff numbers, office space and making better use of IT... Cutting communication costs by £300,000 to the lowest levels in London... Cutting personal advisers to Cabinet Members - at an immediate saving of over £300,000 a year." (HTP JW)

Hurrah for H&F, and may we suggest Telford's councillors pay a visit.


£100 grand nurse

Tyler's mum was a nurse, and the deal was always that they earned a pittance but were viewed as angels. Now:

"AN NHS nurse has broken the £100,000 barrier for the first time as health staff cash in on generous incentive schemes.

The nurse consultant in Rotherham, South Yorkshire, has doubled her basic salary of £50,000 by working overtime under an NHS initiative to bring down waiting lists."

The Sunday Times report updates us on other high earners in the NHS. Many nurses now earn in excess of £60 grand pa, and many consultants are getting over £200,000.

Nothing intrinsically wrong with people earning such sums of course. But this article raises all the old familiar questions. Should nurses be employed as cheap consultants? Should they be able to double their incomes by working Gawd knows how many hours overtime? How have these huge increases in NHS pay delivered anything like sensible value to taxpayers?

(HTP scaredendoscopypatient)


£10m to get robbed

We've blogged before about how quangos spend our money getting us to hand over even more to them. Now we've got some figures:

"PUBLIC bodies are spending about £2m a year on political consultants to help them lobby ministers and MPs for more taxpayers’ money, it was claimed last night.

The close ties between state-funded quangos and the lobbying industry are disclosed in a dossier listing 71 separate contracts worth almost £10m over five years."

Even more jaw clenching is the stinking incestuous relationship between the lobbying industry and government:
"The biggest beneficiary is Weber Shandwick, headed by Labour’s former chief press officer, Colin Byrne, which has lucrative relationships with organisations including the Crown Estate, the Meat and Livestock Commission and the British Museum, worth a total of £1.8m over five years. The firm also employs Priti Patel, a Tory parliamentary candidate and former aide to William Hague.

Also profiting from quango contracts is Grayling Political Strategy, whose managing director, Tanya Joseph, is a former spin doctor for Tony Blair. The lobbying firm offers an “information, intelligence and advisory service” to institutions ranging from the grand, such as the Royal Mint, to the obscure, such as the Northern Lighthouse Board, whose beacons guard the coasts of Scotland and the Isle of Man."

It makes you want to throw up.

And to arm yourself.

(HTP John C)


£2bn loss on equity punt

Several correspondents have highlighted the £2bn immediate loss on the government's equity investment in RBS.

With the existing shares trading at 10p below the offer price for new ones, it was unsuprsing that we got stuffed with the new ones.

Not that it matters. The reality is that we're now underwriting the whole of Britain's banking system, with its combined balance sheet in excess of £6 trillion. What's a couple of bill compared to that lot?

The most important thing - as we've blogged many times - is that if we taxpayers are supplying the capital and taking the risks, then we taxpayers should reap the eventual rewards. And we're by no means convinced HMT is paying enough attention to that issue.

Saturday, November 29, 2008

Job Stats Of The Damned


"It is not the arithmetic of statistics but the fabric of people's lives.

When we talk about three million more people in work since 1997 - that's not just a number, that's a life that's been changed - three million times over. That's the young woman laid off in the mid 90's who's now built a booming business of her own. Three million new jobs not by accident, but by our actions."

When it comes to statistical distortion, Brown has always plumbed the slithery depths, and his boasts on job creation are no exception.

In particular, he likes to suggest that the vast bulk of "his" 3m new jobs have come from Labour's super-dynamic post-neoclassically endogenised private sector - young women laid off by the evil Tories in the mid 90's who've now built booming businesses of their own. The jobs reflect Labour's success in revitalising the economy.

But it simply isn't true. In reality, most of the jobs are being paid for by taxpayers, and far from being a reflection of economic success they are a drain on Britain's wealth producers.

This week, the FT published a fascinating analysis comparing the growth of jobs funded by taxpayers with those funded privately (see here, here, and here - HTP HJ). In a stinging editorial they summarise:

"Two out of three jobs created between 1998 and 2006 have been in sectors dominated by public services: health, education, social work and public administration. Some of these workers - agency nurses, supply teachers and public policy consultants - may legally have private employers, but they depend on the state.

This should lead to a profound reassessment of New Labour's legacy... the surge in employment in the penumbra of the public sector, which between 1998 and 2006 has been 25 per cent or more in much of the country, is no recipe for efficient public services.

Whatever the merits of public sector workers, they are not an investment. They provide services that must be paid for, and in the coming recession it is hard to see how."

What the FT has done is to use figures from the Office for National Statistics' Annual Business Inquiry to calculate job growth across the main industrial sectors of the economy (the underlying stats are all available on the ONS website here).

Overall jobs increased from 28.8m in 1998 to 31.3m in 2006, a rise of 2.5m or 8.5%. But of that 2.5m increase, 1.7m came in industrial sectors dominated by the public sector, either as the direct employer, or the employer of subcontractors and temps - education, health, public administration, police, defence, social services, etc etc (Standard Industrial Classifications L-O).

Hence the FT's conclusion that 2 in 3 of Labour's new jobs are being funded by the public sector.

Or to put it another way, whereas public sector jobs have increased by an eye-watering 21%, private sector jobs have grown by just 3.6%.

And all too predictably, the growth of public sector jobs has been concentrated in LAbour's heartlands. The Mail picked up the story and produced this neat map showing the regional variations (private sector jobs growth on the left, public sector on the right):


Some pretty familiar features there, including - once again - munificent spending North of the border.

So against this evidence, why is it that Brown/Darling are constantly able to claim that most of "their" new jobs have been in the private sector?

The answer is that the official ONS count of public/private jobs uses a different approach. It concentrates on how many people public and private employers directly employ. And on that methodology, whole rafts of public sector workers are counted as being in the private sector.

For example, GPs are not directly employed by the NHS so don't count as public employees. University staff are also not counted because universities are supposedly "arms length". Contract cleaners don't count, even though they may spend all day "cleaning" NHS hospitals, or state schools. Agency nurses don't count, supply teachers don't count, etc etc. And Labour have made a speciality of moving employees off the direct public payroll, especially under the hopeless Gershon "efficiency" programme.

So the official ONS figures give a very misleading picture. In fact, if we didn't know better, we'd almost imagine they were being deliberately fiddled.

But there's something else even worse than the fiddling.

Although the FT report looks at the 1998-2006 period, the ONS numbers actually allow us to look at a much longer period, right back to 1978. And the overall picture is pretty shocking. (Yes, I'm sure there are a few statistical discontinuity gremlins lurking therein, but I'll bet the big picture is right).

Over the whole 30 year period, 1978-2008, the UK has created a net 4.8m extra jobs. But - and you'd better sit down - no fewer than 3.3m of them have been in these same sectors dominated by the public sector. So actually, that ratio of 2 in 3 new jobs being in the public sector is not just a NuLab phenomenon. It's representative of our entire post-70s history.

And that's pretty scary.

Because it suggests that even at the height of the Thatcherite adrenaline rush, job growth actually depended more on the public sector than the private.

Which means that looking forward into the gloom of our high debt, high tax, spending restrained future, there are going to be an awful lot of people without jobs.

We truly have been living a fantasy.

Friday, November 28, 2008

Chasing After The French Model


Strewth! She's even pawned her vest!

Something we've heard a lot recently is that borrowing half a trillion quid won't be a problem because it will only bring us into line with La Belle France.

Brown repeated it in this week's PMQs, and yesterday, Labour's Anatole Kaletsky wrote:

"Hysterical claims that Britain is on the brink of “national bankruptcy”, or that the Government has “run out of money” or that the pound is going the way of the Icelandic krona... are absurd. Britain's public debt-to-GDP ratio, at around 40 per cent, is the lowest among the G7 advanced economies and if it were to rise to 57 per cent, as suggested by Treasury projections, this would not present a serious problem. Nor would it drive up interest rates and inflation, to judge by the experience of Japan, Italy, France and Germany, all of which have public debt ratios above 57 per cent."

Of course, Kaletsky fails to mention that these oft quoted international debt comparisons are shot through with apples and pears problems (which is why the OECD attaches specific warnings of non-comparability to its figures, as we blogged here). And he fails to mention that HMT's UK debt projection omits hundreds of billions of off-balance sheet Enron debt (PFI, public pensions etc). And he fails to mention the trillions of contingent banking liabilities HMG has now assumed.

But setting all that aside, how reassured should we be that Japan, Italy, France and Germany have more public debt than us? Given that Japan has been stuck in a giant hole for nearly two decades now, Italy is... well... Italy, and Germany has never recovered from the dire fiscal consequences of its acquisition in the East.

Let's focus on our nearest and dearest cousin, France.

According to the OECD, in 2007, France's gross government debt was 69.4% of GDP. Ours was 47.5%, so on the face of it, we had a good 20% catch-up space. But note that because of definitional differences, the OECD's 2007 figure for the UK was already 10% higher than HMG's own official figure of 37%, which implies that HMT's official 57% debt/GDP forecast will take us right up to the current level of French indebtedness.

So how will that feel? Here's what the French Prime Minister said last year, even before the current crisis broke:

"I am at the head of a state that is in a position of bankruptcy. I am at the head of a state that for 15 years has been in chronic deficit. I am at the head of a state that has not once passed a balanced budget in 25 years. This can't go on."

Which doesn't sound altogether encouraging.

And neither does France's long slide down the international league table for prosperity: GDP per head is currently 7% below us, whereas a quarter century ago they were 10-15% above. In contrast, it has climbed up the table for structural unemployment (8% according to the OECD, compared to our 5%).

But it's on the tax front that the consequences really show. Whereas our taxes have been running at around 40% of GDP, theirs have been running at 50%. And part of that difference is accounted for by the higher interest payments they must pay on their higher government debt.

As we've blogged before, national bankruptcy can come in many different forms. At the extreme end we have the Argentine blow-out. But a long lingering death of high taxation and deteriorating public services would do just as well.

Already, the cost of issuing HMG debt is going up. Under the headline "UK and Italy struggle to entice investors" today's FT reported:
"The UK and Italy struggled to sell bonds on Thursday in a fresh sign of the difficulties governments are facing because of the debt needed for economic stimulus packages and bank recapitalisations.

The two bond auctions saw both governments forced to pay higher yields to attract investors and Italy scaled back the amount on offer.

Analysts say it is an “ominous” warning that debt raising is likely to become even tougher in the coming months if problems are emerging so soon after government announcements to increase issuance. A record of more than €1,000bn ($1,290bn) of debt is expected to be issued in Europe next year." (HTP Joan W)

And you know the really alarming bit? The market is bracketing us not with France, but with Italy. That didn't even happen in the 70s.

High Quality Crock


Not quite as advertised

Remember all those official assurances about how our £100bn would be safe with the Crock? The huge deluge of "comfort" from our rulers and betters that the guarantees would cost us nothing?

No?

Well, here's a reminder (and see all previous Crock blogs gathered here):


  • FSA - "We believe [Northern Rock] is solvent, meets all capital requirements, and has a good quality loan book." (FSA chairman Callum McCarthy 17.9.07)
  • Darling - "Bank of England lending is secured against Northern Rock's assets such as high quality mortgages, assessed by the Financial Services Authority as being of good quality" (21.01.08)
  • Brown - "Most people agree that Northern Rock has a quite high-quality loan book and I can assure you that our aim in all of this is to secure the best deal for the British taxpayer." (20.01.08)
  • Cooper (Yvette, not Tommy... or was it the other way round?) - the guarantees "have not been called upon, so they've not actually created any cost for the taxpayer"(18.2.08)

Wellwaddyaknow? The Treasury has finally admitted what we've all known for well over a year. With the Crock's mortgage arrears having quadrupled since December, its repossessions soaring, and 20% of its loan book anticipated to be underwater (ie negative equity) by next year, HMT minister Lord Myners now says:

"Foreclosures are higher in Northern Rock than in other mortgage lenders because its lending was more irresponsible. It is as simple as that."

A big round of applause for his Lordship: a Treasury minister recognising that truth is a first step to gripping the real crisis (NB Myners is new, so this may well be his first and last essay in candour).

But of course there's a much bigger issue now: whereas the Crock was a measily £100bn of exposure, we're now effectively guaranteeing the entire UK banking sector. And its liabilities weigh in at well over £6 trillion, including a very scary £3 trillion of foreign currency liabilities (ie the stuff HMG can't print).

So how good is their loan book? How good are all those impenetrable securities they've piled up?

I think we can guess the horrible answer.

Wednesday, November 26, 2008

Are We Bust?


He's after your wallet

On Monday, Tyler was so shell-shocked by the afternoon's financial revelations he went down with a nasty dose of something, almost certainly Publicus Debitum Gravis. But after he'd taken to his bed, Mrs T made the mistake of watching a late night horrorshow with Niall Ferguson. In graphic detail, the Prof described how a breed of reptilian replicant humanoids, known as politicos, routinely suck the lifeblood out of their innocent citizens, and if left unchecked will destroy the very fabric of civilization. Mrs T was scared to death.

In case you don't know it, the Argentine debt crisis is a hideous tale of grossly mis-managed public finances leading to ballooning public debt. Debt that spirals way beyond the long-term servicing capacity of the state. Hyperinflation ensues. Governments fall. The currency collapses, credit is cut off, and barter replaces cash. Nobody wants to hold the national currency and bank accounts are emptied. Then things get really nasty. In 2001, the Argentine government froze/confiscated all bank accounts. Riots in the streets. The economy died. Over 50% of the population sank below the poverty line.

Gulp.

And the Icelandic version of the tale may well turn out even worse - each and every one of Iceland's citizens are now liable for well over £100 grand of public debt, all denominated in foreign currency. There is no credible plan for repaying it, and Iceland's credit is effectively worthless.

Could it happen to us? asked an edgy Mrs T. Because if so, let's get the gold now and bury it in the garden. And buy some shooters.

A good point.

Then yesterday, longtime BOM correspondent HJ sent a link to a US consumer credit blog, which has calculated a startling comparison of indebtedness. Specifically, it has applied a standard consumer credit ratio - the ratio of debt to income - to the whole economy. It has worked out an "effective net worth per citizen", and it finds we are horrifically worse than any other major economy:



Now of course, we economic sophisticates could come up with all manner of arguments as to why the straight difference between external debt and annual income is totally meaningless. But in today's circs, we can't seem to think what the arguments are, mainly because we're spending most of our time in bed hiding under the duvet.

So what will happen? How on earth are we going to pay down all this debt?

I'll tell you - tax.

Tax, tax, tax, and more tax.

We will be working for the government's creditors. Just like after WW2. A new age of austerity.

And to get a sighting shot on how bad it will be, consider the Chancellor's own forecasts. Despite their ludicrous optimism, it turns out that half of the income growth he reckons we'll get post-2010 will go in tax. Bang. Just like that. He forecasts a c £350m pa increase in money GDP, and an increase in tax of c £175bn pa.

I've instructed Mrs T to stick to Desperate Housewives in future.

Time To Choose The Good Way


Are you sure this is the Good Way?

No blog yesterday - Tyler was too depressed by the BBC/C4 coverage of Monday's horror show.

They seemed to buy the government line pretty well whole: entirely out of the blue, those crazy yanks blew up the world financial system, and with it, the global economy. Brown/Darling have heroically launched a massive fiscal rescue package to reflate the economy and stave off another Depression.

All right thinking people like it. Bishop Snow likes it, and even had Victory posters of Gordo as Winston Churchill stuck up round the C4 News studio. Will Hutton likes it. Anatole likes it. Everybody likes it.

Except of course, the heartless Tories. And those selfish small traders who've spent the last two days calling radio phone-ins to whine about having to change a few price tickets and pay extra duty on diesel.

Yesterday, the IFS gave us some much more sensible analysis.

We won't dwell on the horror highlighted by their debt and borrowing analysis - BOM readers are only too familiar with that. But one point they make quite clearly is that even the government now recognises its public spending habit is totally unsustainable.

How do we know that?

Because they've been forced to accept spending cuts as the only realistic hope for reining in their massive borrowing.

As we know, the pre-election fiscal "giveway" so praised by Snow et al, is swamped by the fiscal takeaway/bombshell planned for later. According to the IFS, in 2012-13 the planned takeaway will be running at £22.5bn pa, or getting on for £1000 pa per household.

But the interesting thing is that most of that - £18.6bn - will come not from tax increases but from spending cuts (relative to previous plans).

Now, you might think that we'd applaud that, and in broad terms we do - our dire economic outlook means the need for growth stimulating tax cuts is greater than ever. But the way the spending cuts are being lined up is a re-run of every Labour public spending crisis we've ever had.

In particular, the heaviest cuts will fall not on day-to-day activities, but on public investment programmes - the very thing Brown has always slammed the evil Tories for.

As we learned during the Wislon/Callaghan years, in terms of value for taxpayers' money, this road is known as The Bad Way. It comprises successive waves of arbitrary cuts, starting with the easy ones like capital spending, and culminating in across the board percentage haircuts for all spending departments. Rationality goes out the window, public services get whacked, and taxpaying consumers pay the price.

But there is another way. It's called The Good Way, and now is the time to choose it.

The Good Way comprises the grasping of nettles. It comprises breaking up the big public service monopolies and harnessing choice and competition to drive improvement (see many previous blogs).

Why now?

Because right now, we no longer have that oh-so-seductive alternative of simply pumping in more cash. There is no more cash. And as we saw so graphically in the 70s and 80s, The Bad Way with no cash, is no place for anyone.

Monday, November 24, 2008

Blow-Out


57% will take us to a whole other level

Well, we knew it would be bad, but we didn't know quite how bad.

Despite some £6bn pa of extra taxes from 2010-11, Darling is forecasting a huge borrowing binge. As George immediately pointed out, in the next five years the government will borrow nearly £0.5 trillion, doubling the existing National Debt. By 2012-13, our official National Debt will be 57% of GDP, higher than at any time since the early 70s (and it was only that high then because we were still paying for WW2).

And remember that's all on top of the massive debt he's accumulated guaranteeing the banks, and it excludes all the hundreds of billions of Enron off-balance sheet items.

But the worst of it is that, even though Darling's projected borrowing is gob-smacking, he's only been able to keep it as low as it is by making some ludicrously optimistic assumptions on economic growth.

He's assuming an extraordinarily mild recession, with GDP falling by only 0.75% cumulative this year and next. That's much less than it fell in the last two recessions, and they didn't incorporate a global financial crisis. Even whackier, he's assuming growth then returns to an average 3%pa from 2010-11 onwards - which is actually higher than he assumed in his last forecasts.

It is pie in the sky.

And he's no better on public spending. Not only is he assuming another £5bn pa of those non-existent Gershon "efficiency savings" (see many previous blogs), he's also claiming he'll restrict public spending growth to 1.2% pa in real terms. Given that he'll be dealing with much higher unemployment spending, it will be fascinating to see what he plans to cut... and how he plans to locate some backbone.

We'll post again once we've had a proper look at the report. But this is a bad news budget that's actually even worse than it looks.

Bad News For Moggies


Carry me to my car Miss Jones

This afternoon Old Labour will update us on their definition of fat cat. Reportedly it's anyone on an income over £150 grand pa.

Quite coincidentally, the TPA has just published this year's Public Sector Rich List. And as you may recall, £150 grand is also the entry point for inclusion there.

This year there are 387 assorted quangocrats and public sector bureaucrats earning above the magic number (excluding Town Hall officials who have their own separate list). That's up from 300 last year. As a group, their pay has been increasing by 11% pa, and the top package is now £1.24m pa (the head of Network Rail).

But at least all these people now face the tax on fat cats.

You couldn't ask for a clearer acknowledgement of just how badly Labour has bogged up public sector pay.

Undermining The Future


So it's goodbye to New Labour. The leaked increase in our top marginal tax rate will only raise about £1-2bn pa of revenue, but the message it sends is much more significant.

Despite a mass of evidence to the contrary (see many previous blogs), Labour has never believed that lower taxes lift economic growth. And they have certainly never felt comfortable with Lawson's 40% top rate for the "super-rich". As far as they're concerned, if anyone flees the country just because they have to shoulder a fairer share of tax, good riddance, because they're not people we want here anyway.

The 2011 increase to 45% will lift our combined top rate - including the employee National Insurance contribution - to 46%. Which is almost exactly in line with the current OECD average of 46.2%. But that doesn't mean we can get away with it:
  • The trend among most OECD competitors is down
  • Tax levels in many of the big emerging economies are much lower than in the old OECD

The big picture is that under the cover of a reflationary budget, Brown is unpicking even more of his Thatcherite supply side inheritance. It's back to good old "Keynesian" demand management, the very thing that failed so catastrophically in the 70s.

There's a very real question as whether the fiscal boost will actually work in the short-term, given that we are all being told we'll have to pay it back in a couple of years. But in the long-term it will leave a legacy of high debt and high tax that will undermine our prosperity for years to come.

Just like Old Labour always did.

PS If you've got any spare cash at all, you should put in a bid for the final remnants of the Georgian silver and Canaletto collection Brown will be auctioning off. For obvious reasons, bidders for the new wave of asset sales will be thin on the ground, and Brown is a desperate forced seller.

Sunday, November 23, 2008

Punishing Savers


Death to the rentier class! Plasma tellies for the people!

Lefties hate savers. Ever since kindly old Uncle Karl explained how savers live off the backs of the workers, left-wing governments have routinely taxed them, dispossessed them, and if at all possible, shot them. Private savings are anathema to the well ordered state because they permit bourgeois anti-social elements to ignore the Will of the People.

Comrade Brown has been a real Hero of the Revolution. Among his very first acts on coming to power was the confiscation of tens of billions from private pension funds, and the axing of tax-free schemes for small savers (Peps and Tessas). He has since done everything in his power to encourage indebtedness over savings, not least in his own conduct of the public finances.

Now, of course, those debt chickens are noisily roosting, but rather than encourage saving, his response is more of the same.

First, he nationalised the debts of our banks. As we blogged here, they amount to over 400% of GDP, and we have no idea whether they are backed with assets worth anything like that.

True, by guaranteeing bank deposits, he is protecting savers. But by acting as the banks' guarantor - not to mention the tens of billions of equity capital he's also pumping in - Brown now has the power to direct precisely how the banks conduct their business. And he's directing them to lend even more. He says:


"We've got to get the banks to start lending... We're determined to see banks start lending to families and businesses, to fulfil the commitments they themselves have entered into. The Government have accepted their responsibilities and it's important that other parties accept theirs as well."
Translation: I'm ordering my banks to drop their dogmatic old-fashioned insistence on credit assessment; I don't care that cash-strapped borrowers in a recession may not be able to repay; and if the banks don't play ball, I will nationalise them and despatch Commissar Balls to enforce field discipline.

So it's no surprise that Brown dependent RBS has today announced that it will keep lending to all its small business customers on unchanged terms, even though the world has become a much riskier place for such loans.

And who will pick up the tab for this clear borrower subsidy?

Yup, that's right, savers. If the banks can't rebuild their profitability via increasing loan rates and shutting off dubious borrowers, they'll have to do so by slashing savings rates. Knowing of course that Brown won't lift a finger to protect savers.

And then there's tomorrow's tax 'n' spend "giveaway". As we've blogged before, the main beneficiaries will be Gordo's favoured groups - the ones who routinely consume more than they produce, the ones who can be relied on to spend every penny they get, whether its begged, borrowed, stolen, or handed out to them by a benevolent Commissariat.

The main payers (post-2010) will be wealth producers and savers - the anti-social elements Uncle Karl warned us about. The bourgeoisie who think it's perfectly OK to save and accumulate personal wealth, and to ignore their wider duties.

The clear lesson of history is that it never makes sense to save under Labour. What they don't tax away, they sooner or later destroy through inflation, or by nuking asset values via a collapse in market confidence. Which is why the UK stock market is now 15% below the level Brown inherited way back in 1997, whereas the "cause of all our woes" US market is still 15% up (Dow).

Tomorrow, as soon as we get that VAT cut, the Tylers are off out to blow their few remaining savings on a collection of 60 inch plasma TVs, his and hers Porsche 911 GT2s, and some top-of-the-range cosmetic surgery.

There's no way we're hanging on to savings just so they can be taxed/inflated away in 18 months time.

PS M'learned friend the Village Postmaster makes an excellent point about the prospective cut in VAT. Since VAT is levied on turnover, not on an item by item basis, there is no compulsion on retailers to spread the 2.5% cut evenly across the shop. It would be much more rational for them to load the cut onto items where there'd be the biggest response in terms of extra sales. F'rinstance, booze - Tescos could load the cut on to their famous 22p lager - get it down to say 15p a can. Or fags - what about giving smokers a break? Or petrol? These are all things that have really suffered from having a high tax madman at the controls. And surely nothing would cheer us up more than cheaper booze, fags, and gas guzzling? The Postmaster describes the VAT cut as Gordo's contribution to the marketing budget of our biggest retailers. Sirs Terry and Stuart will be pleased. As will the overseas manufacturers who now supply our shops with virtually everything we'll be buying.

Saturday, November 22, 2008

Guardian To The Rescue


(Click on chart to enlarge)

Following this post where we praised the US Death & Taxes wallchart, several correspondents have drawn our attention to the Guardian/IFS version of the same thing for the UK.

While not quite as detailed as D&T, it's certainly a worthy effort. It shows exactly where our £0.6 trillion goes, and it's all gathered together in one handy place. Ahead of Gordo's new splurge, I suggest we all spend a few minutes studying it.

Friday, November 21, 2008

Angry At Mr Angry


Back when he still enjoyed a good joke

Mr Angry just can't bottle it up any more. A couple of weeks ago he was angry at foreigners:
"What I'm angry about at the moment is that the proposals we've been putting forward for years, which might have helped deal with the problem, have not yet been implemented... while we wanted to go ahead with these changes, other countries did not."

And today... well, blow me down, he seems to be angry at foreigners again (Jeremy Vine Show 1 hour 19 mins in):
"I'm angry about what I saw happening in America - really angry - because these were risks people were taking that we knew nothing about, and they've affected everyone right across the world."

No wonder he's angry. For was he not the most successful Chancellor in history? Did he not preside over a decade of prosperity unparalleled in the long and noble history of these islands? How dare these foreigners let him down by doing risky things without informing him.

Of course, if he wants to see some real anger he should come down our way and mention that appalling bloke who just last year told us such Monstrous Lies as the following:

"In 2008, alongside North America, our growth will again be the highest in the G7 - between 2½ and 3 per cent - with the same rate of growth also in 2009 - under this Government, with stability in this as in every other Budget the foundation, sustained growth year on year."
Reality check - the IMF now expects the UK economy to contract faster than any other in the G7.
"Just as our monetary discipline is the foundation of our economic strength, our fiscal discipline is the foundation of the strength of Britain's finances...

Britain's net borrowing, which in the early 1990s went as high as 8 per cent of our national income is this year just 2.7 per cent.


Compared to a deficit equivalent of over £100 billion in a single year in the early 1990s, the figure for this and future years will be £35 billion then 34, 30, 28, 26 and 24 billion."


Reality check - borrowing this year is on track for £70bn, heading for £150bn pa, or about 10% of GDP. Far far worse than anything under the Tories, and far worse than any other G7 economy.

Gah! It's no good. I had intended to Fisk the whole of Gordo's 2007 Budget speech, but I'm too angry to read it.

This crisis simply cannot be shuffled off onto perfidious foreigners. Gordo presided over an economy built on a gigantic wobbly bubble of debt. He took huge risks that he certainly didn't tell us about. Sure, part of his failure was crass incompetence. But much of it was down to his sheer arrogance, and yes, his wholesale deceit.

That 2007 Budget speech will live in infamy. Nobody can possibly forget his revolting performance taunting the Tories with the surprise 2p cut in income tax (pic above). And there must be a special place reserved in hell for a supposedly socialist Chancellor who will happily sacrifice the poorest workers in Britain just so he can score a cheap political point. A man like that would sell his own granny.

Oh, and one other thing. This now notorious Budget speech has mysteriously disappeared from its usual position on the HM Treasury website. All it now says is Error.

It sure was.

(HTP HJ)

Thursday, November 20, 2008

Unmerry-Go-Round


Someone's being taken for ride

Another day, another government subcontractor fiasco. Yesterday it was Liberata cocking up big time on their £80m contract to pay Educational Maintenance Awards. The government has sacked them and appointed Crapita – the very people they’d sacked to appoint Liberata. It’s a go-round all right, but not a merry one.

On Newsnight, the £1m pa tax-funded Pantomime Paxman blamed the Tories – it’s their fault for introducing government to the idea of subcontracting in the first place. We agree with him – the Tories should have been thinking far more radically. Instead of subcontracting hospital cleaning, they should have been breaking up the NHS and instituting competing social insurers directly accountable to customers – a point for the future.

We’ve lost count of the subcontracting fiascos we’ve recorded on BOM. And there are some common features:

  • Government departments and quangos are terminally hopeless at appointing and managing subcontractors. They are incapable of specifying their requirements upfront, incapable of negotiating robust, properly priced, contracts, and incapable of monitoring satisfactory delivery. Anyone who is any good at such work leaves for the private sector, where they both earn more, and escape the life-sapping clutches of the Commissars.
  • Government subcontractors routinely over-promise and under-deliver. In this case, Liberata reportedly never had the IT capability essential to delivery: they presumably reckoned the Simple Shopper would never insist on kicking the tyres before buying.
  • Subcontracting can undermine frontline delivery. The contractors’ customer is generally at the centre, not at the level of the hospital ward or GPs’ surgery, which means frontline public sector staff no longer have direct day-to-day control. The devastating results with, say, ward cleaning are all too clear.

So should we abandon subcontracting altogether?

No. Some subcontracting has worked. In Tyler’s hood, rubbish collection has been subcontracted, seems to work well, and is generally believed to be much cheaper than the old in-house arrangements.

But there are two key points to highlight. First, the contract for Tyler’s rubbish collection is a local one. The collectors are directly accountable to Tyler’s local councillors, and they in turn are directly accountable to him. It only takes a handful of votes to change his councillor, and the councillor is fully seized of that fact. In other words, the end-customers have some real traction.

Second, rubbish collection is a pretty self-contained business, and it’s fairly easy to hold the contractor accountable for the results. Contrast with say hospital cleaning, where responsibility for superbugs may be down to poor cleaning, or poor nursing, or some unfathomable combination of the two, or neither.

Both nurses and cleaners are involved in a joint effort, and it’s very difficult to correctly identify and specify their precise responsibilities. Indeed, if you try too hard, you end up with a 5,000 page contract which requires permanent onsite lawyers to interpret before anyone can do anything: the costs of implementing a fully specced contract end up outweighing the purported benefits of outsourcing.

(Economics has yet another branch devoted to this issue – the transactions costs theory of the firm – which explains how there is a balance to be struck between the benefits of market-based specialisation – outsourcing, say - and the costs involved in formalising every single transaction).

What these contracting fiascos are really telling us is some all-too familiar truths: Big Government is hopeless at organisation, and hopeless at shopping. By intermediating its blundering self between us and our end-suppliers it ensures we get the worst possible deal.

PS Talking of the tax-funded pantomime Paxman, Sir Philip Arcadia Green had a good shot at Humphrys this morning. Noting that the state broadcaster takes great delight in talking down the market economy and willing its collapse, he asked how the BBC would behave if it had to support itself from advertising revenue rather than £3bn pa of our taxes? Humphrys drew himself up to his full moral height, and said they’d continue to report The Truth. Right. And also, if it had been Sir Trevor instead of John Sergeant, would the BBC have still thought it OK for a judge to refer to him as a pig in Cuban heels?

Wednesday, November 19, 2008

Clear Blue Water


Needs to be clearer still


Well, it certainly looks like clear blue water. Labour will repay the fiscal splurge from higher taxes, and the Tories will repay from lower spending. Butskellism has been re-interred and we voters once again have a real choice. At long last, Dave and George have summoned up the nerve to claim their rightful Tory inheritance.

You’ve got to cheer.

And we do.

But we’ll cheer even louder if they now take the next step, and bolt their new policy into a comprehensive medium term fiscal strategy - including that third fiscal rule creating space for tax cuts by limiting the growth of public spending over time. Maybe they could call it… ooh, I don’t know… the MTFS.

As we’ve blogged many times, the great economic attraction of fiscal rules is that they commit our backsliding politicos upfront. And in current circumstances, that’s particularly important in order to reassure financial markets that there is a coherent plan to bring our ballooning debt back under control.

(Yes, we know the appalling Gordo drove a coach and horses through his rules, but a), he failed to establish an independent monitor, b), his rules were incomplete, and c), he was operating during the fat years of easy money).

We think there’d also be political advantage in announcing an upfront strategy. Ever since the current leg of the crisis broke, the Tories have looked well behind that Curve everyone goes on about. Skewered on their "sharing the proceeds of growth" slogan, they were completely unprepared for the recessionary world we’ve now entered. There was no real plan, and it showed.

A medium term fiscal strategy would get them back on the front foot. Suddenly, they’d be the ones with the serious plan, and Brown/Darling would be the ones thrashing around making it up as they go along. (And Tyler is going to scream if he has to listen again to ministers being allowed to claim unchallenged that their upcoming splurge is part of some coordinated global plan for fiscal reflation – as we blogged here, there is no global plan – Brown/Darling are making it up all by themselves).

But, I hear you ask, how would such fiscal rules possibly cope with the current recession?

First – as we’ve always said – the rules have to be cyclically adjusted. Clearly, you wouldn’t keep the budget balanced in a recession – the so-called automatic stabilisers (higher social security spending, lower tax take, etc) would be allowed to operate as now.

Second, the rules could easily accommodate some modest fiscal boost in a crisis as big as this one. Accelerating already planned capital projects would be one possibility, and another would be to bring forward planned tax cuts (remembering that a key element of our plan is to make room for tax cuts over the medium term). And any fiscal boost today would be clawed back against the stated plans for later years in an open and transparent way. We wouldn’t just be plucking figures out of the air.

Having taken the first and most difficult step, Dave and George now have a great chance to consolidate the Tories on this vital high ground. They can set out a clear medium term plan under which our bloated public sector would be brought back into earth orbit, our debt would be paid down, and best of all, our taxes would be cut.

PS Don't know how to cut spending without closing all our schools 'n' hospitals and chucking all our poor widows and orphans out into the snow? We suggest you spend a couple of days scrolling through the near four years of entries on this blog. It should give you one or two ideas.

Tuesday, November 18, 2008

Tax Cons


He'd have approved

We learned yesterday that what Gordo giveth, Gordo will be takething away pdq. Immediately after the next election, he'll be throwing the tax gears into reverse to claw back the "giveaway" we'll be getting next week.

But how can such a strategy possibly work? Surely we punters will see straight through it, recognising that such short-term tax cuts are not something we can safely go out and spend. We'll need to save them in order to pay the deferred tax hikes post-2010.

In fact, there's a whole branch of economic theory devoted to just such situations. It's called Ricardian Equivalence, after the great 19th Century economist David Ricardo. Pointing out that government borrowing is nothing more than deferred taxation, Ricardo suggested* that it therefore makes no economic difference whether government funds itself via tax or debt. People cannot be conned by tax cuts funded by borrowing.

So is Gordo's giveaway a gigantic con?

Yes. But not in the way Ricardo might have suggested*. In truth, the upcoming tax cuts should have quite a strong impact on demand in the economy, not immediately negated by an increase in saving. That's because those that get the biggest tax cuts now will not be the same as those who can expect the biggest tax increases post-2010.

The main beneficiaries will be Gordo's favoured groups - in particular, families with children, lone parents, and those who have not saved. That is to say, they will be the welfare dependent groups who routinely consume more than they produce. Since they are very likely to spend every penny he gives them, he can rely on them to discharge their public duties in full.

The main payers post-2010 will be wealth producers and savers. These are the anti-social elements long reviled by forward thinking radicals. The bourgeoisie who think it's perfectly OK to save and accumulate personal wealth, and to ignore their wider duties to the state.

In other words this so-called tax giveaway is in reality a further massive extension to the discouragement of enterprise and effort Gordo has been working on ever since 1997. All implemented through his incomprehensible and wildly expensive tax credit system (see previous blogs too numerous to mention).

You might want to bear that in mind when you cast your vote in 2010.

*Footnote: In reality, Ricardo was far more subtle than the textbook version of Ricardian Equivalence might suggest. He understood that people are not rational calculating machines, and can easily get taken in by "fiscal illusion", under which immediate tax changes weigh more heavily in their minds than the eventual repayment of the associated government debt. Something that our politicos have always understood instinctively.

Monday, November 17, 2008

Firm Plus Flaccid Equals F-F-Fecked


Labour winters are always f-f-f-freezin'

So can we get away with Gordo's "tax giveaway"? Will the international capital markets stay cool? Or will we get whacked by one mutha of a financing crisis?

As regular readers will know, one of Tyler's must-read blogs is Prof Willem Buiter's Mavercon. LSE prof and ex-member of the Bank Monetary Policy Committee, Buiter has been excellent on the credit crunch, the bail-outs, and all points South. We don't agree with everything he says, but he always offers a serious and provocative analysis.

Last week he wrote a typically robust piece entitled How likely is a sterling crisis or: is London really Reykjavik-on-Thames? Noting that HMG is now effectively guaranteeing Britain's entire banking system, he highlights the massive extent of that commitment.

Here's his chart of UK banks' total liabilities relative to our GDP. The top line is banks' overall liabilities, and the lower line shows their foreign currency liabilities (superimposed on their virtually identical foreign currency assets):



As we can see, total liabilities are now well over 400% of GDP, with foreign currency liabilities well over 200%. Both have more or less doubled since Labour took power - an astonishing increase. And both have now landed squarely on the shoulders of us British taxpayers.

Buiter writes:

"The key question is, can the government meet all these fiscal commitments, whether firm or flaccid, unconditional or contingent and explicit or implicit ? Does it have the resources, now and in the future, to issue the additional debt required to meet the growing volume of up-front obligations it has taken on?"


Of course, in the best of all possible worlds, everything's fine. The crisis passes, the economy starts growing again, the banks don't need continued taxpayer guarantees, and everyone lives happily ever after. Hurrah!

But what happens if the best of all possible worlds doesn't come to pass? What happens if the guarantees get called? What if the banks' assets turn out to be worth a lot less than they purport to be worth? And what if all those foreign currency creditors rush for the exit, demanding their money back?

Sure, with sterling creditors, HMG can just make the Bank of England print some more fifty quid notes: it devalues the currency but governments in a debt corner have never worried about that. But when foreign currency creditors want their money back, that's an entirely different matter. They don't want sterling, and the government doesn't have a printing press for foreign currencies.

What you then get is a sterling collapse and a complete freeze on any new private capital inflows from abroad - who'd want to lend to a country which can only repay in a nose-diving currency?

Which might not matter that much if we didn't have a massive current account deficit. But we do - when last sighted it was running at 3% of GDP, or around £50bn pa - and unless we can continue to borrow we have to slash our imports back to banana republic cash-on-delivery levels. Which with all our imported energy, would make for a very cold winter indeed. Any takers for another Attlee winter (1947 -pic)?

Of course, longtime Labour supporters like Anatole Kaletsky scoff at such a scenario. They apparently believe that a big strong economy like ours can carry another £15-30bn on the annual fiscal deficit, no problem.

But read Prof B. He explains precisely how we could head the way of bankrupt Iceland - a relatively small economy whose banks have ballooned way out of proportion to everything else, where the government has effectively nationalised those debts, and where the foreign currency debts are beyond the resources of taxpayers to redeem.

And just a quick reminder: you are going to need thermal underwear, candles, and a large supply of hi-energy bars. Oh yes - nearly forgot - you also need to decide where you're going to emigrate to. Do it now.

PS The man who wants governments to increase their borrowings by 2% of GDP? Ah, that would be French Communist lothario Dominique Strauss-Kahn, a man whose 2007 appointment as IMF head underlined just how irrelevant the organisation had become.

Update: That Arctic winter is already on the way.

Sunday, November 16, 2008

There Have To Be Consequences


Hack it back to basics

All weekend long we've been listening to the People's Broadcaster reporting the grave news about George Osborne.

As we know, Osborne has been criticised by the government - the government, mark you - for daring to suggest that their policy of fiscal incontinence might possibly blow sterling apart (see this blog). And the BBC has dutifully followed the government line that Osborne is a dangerous halfwit who is single-handedly undermining the financial salvation offered by the Great Helmsman.

WTF do the BBC think they are? The main story of the weekend is quite simple and very different to this partisan nonsense. It is that the G20 has firmly rejected/ignored Brown's half-baked proposal for internationally coordinated fiscal reflation. Coordination that was absolutely vital if Brown was to stand any chance of getting away with his giant tax "giveaway" here.

Maybe the BBC journos haven't bothered to read the communique. So for their benefit, here's the sole mention of fiscal reflation:

"We will... use fiscal measures to stimulate domestic demand to rapid effect, as appropriate, while maintaining a policy framework conducive to fiscal sustainability."

Translation: we have specifically not agreed to Brown's coordinated fiscal reflation (I know you don't need it spelled out, but just for completeness - "as appropriate" means that no member government is agreeing to do anything unless they themselves decide to do so; "while maintaining a policy framework conducive to fiscal sustainability" means many of the other members think Brown-style fiscal reflation would jeopardise hard-won stability... and probably their own currencies).

What happens if we go ahead on our own? First, much of the boost will leak straight out overseas, failing to lift our own economy substantially, but adding to our already massive current account deficit. Second, it stands a good chance of spooking the currency and bond markets... just like George says.

Look, we know we keep going on about the pants lefty tax-funded BBC, but we've just had enough. On a personal level we are seriously thinking about joing the telly tax rebels who refuse to pay (especially now we know the BBC has backed away from prosecuting). And on a national political level, there have to be consequences for the way they systematically undermine our future well-being by supporting Big Government Labour and bashing any Tory who even hints at believing in smaller government.

Come the Revolution, this time the BBC must at the very least be hacked back to that one TV channel and one radio station. There must be no mercy.

News From BOM Correspondents- 9


Gold plated Hummers

Latest news and links:

Death & Taxes

One of the major problems in campaigning against Big Government waste is that people find it difficult and/or monstrously boring to wrap their heads around just how government actually spends their money.

In the US there's far greater availability of information, and campaigners have found imaginative ways of presenting it. One of the best is the Death & Taxes wallchart, produced and published by Wallstats.Com. It's a "visual guide to where your Federal Tax Dollars go", and it's crammed full of fascinating detail.

For example, it tells us that the President costs a chunky $355m pa, while Congress comes in at an eye-watering $5.1bn pa. The Global War on Terror is clocking up $189bn pa, including this year, $2.1bn on 10,878 Humvees (which at $190 grand apiece seems to be c50% over the normal list price, easily obtainable by anyone but a military procurement official armed with the taxpayer's chequebook).

It's an great chart and we must see if we can get something similar put together for the UK.

(HTP LH)


New Element in Periodic Table

An excellent forum post by evasive on the Mother Board:

"Research has led to the discovery of the heaviest element yet known to science. The new element, "Governmentium" (Gv), has one neutron, 25 assistant neutrons, 88 deputy neutrons, and 198 assistant deputy neutrons, giving it an atomic mass of 312. These 312 particles are held together by forces called "morons", which are surrounded by vast quantities of lepton-like particles called "peons". Since "Governmentium" has no electrons, it is inert; however, it can be detected, because it impedes every action with which it comes into contact.

A minute amount of "Governmentium" can cause a reaction that would normally take less than a second, to take from four days to four years to complete. "Governmentium" has a normal half-life of 2-6 years; it does not decay, but instead undergoes a reorganization in which a portion of the assistant neutrons and deputy neutrons exchange places. In fact, "Governmentium's" mass will actually increase over time, since each reorganization will cause more morons to become neutrons, forming "isodopes". This characteristic of moron promotion leads some scientists to believe that "Governmentium" is formed whenever morons reach a critical concentration. This hypothetical quantity is referred to as critical morass.

When catalyzed with money, "Governmentium" becomes "Administratium", an element that radiates just as much energy as "Governmentium" since it has half as many "peons" but twice as many "morons".

(HTP Dave C)


Public Sector Pensions

Pensions guru Ros Altman has long highlighted the unfairness of private sector employees with generally inadequate pensions being forced to shell out billions on those gold-plated public sector pensions. Now, she's urging new public sector recruits to get in quick:

"Those who have a public-sector pension will be the new aristocracy. If you are in the public sector and if you have a job and a pension, then do your best to keep it – understand the true value of it.

If you are just starting out in a career at the moment, as things stand you will be better off at the end of your working life if you are in the public sector. A civil servant will be far better off at retirement than a bank manager or a company director... I honestly don’t think it will last. They have five years – max.

Let's hope she's right. But this government certainly doesn't have the balls to take on the public sector unions, and if we taxpayers want to see change we are going to have to shout a lot louder.

(To underline the huge gap between public and private sector entitlements, the article quotes the example of Metropolitan Police Acting Inspector aged 48, who can look forward to a guaranteed index-linked final-salary pension of £27,330 a year in two years time. You can't actually get a quote for such a deal in the normal annuity market, but Tyler's fag packet says it would cost well north of £1m).

(HTP HJ)

Dockets Replacing Responsibility

Further to the horrific Baby P case, Theodore Dalrymple - who has worked in both the NHS and our prisons - picks up the same points we blogged a couple of days ago. He says:

"When a problem reveals itself, the response is a curious one, that is to say simultaneously one of work creation and work avoidance.

The work creation consists of instituting ever more “failsafe” and “best-practice” procedures, usually with all their associated paperwork, which are then bowed down to and worshipped like the Golden Calf. Of course, this creates the impression of terrific pressure of work, that can be relieved only by the employment of more and more staff with strange titles such as Compliance Manager and Best-Practice Co-ordinator.

This work creation is dialectically related to the work avoidance. So much effort goes into the procedure that no time, energy or inclination is left over to secure the alleged purpose of the procedure.

Documentation is its own justification; and a superstition now exists among the police, nurses, doctors, social workers, prison officers and no doubt others that nothing can go wrong if the forms are filled in correctly. Anyone who has been to a coroner's court lately will know that this is a superstition shared by many coroners.

When procedures become so exacting and time-consuming, the exercise of judgment is deemed neither necessary nor possible. Indeed, it will get you into trouble, because it is not part of the procedure. There is simply no contest between the most obvious reality, staring you in the face, and what the form says. The form says it all, and wins every time."

Spot on.

(HTP Pete S)


British Council Rap Vid

Longtime useless quango, the £0.5bn pa British Council, has found a new way to burn our hard-earned money - making a rap video for India. Gah.

It's all here on David Blackie's blog The Language Business.

Saturday, November 15, 2008

The Gnomes Lose Confidence


I'll tell you what we think of sterling

Following the Traitor Osborne's unspeakable attempt to undermine the People's Pound, the state broadcaster has relayed this important announcement from the Supreme Leader:

"I regret the partisan talk from the opposition. At a time when nations are coming together all over the world to deal with these problems, I think people are looking to politicians to be responsible and to show leadership."
As always, patriotism is the last refuge of the bankrupt politico. In reality, George's supposed betrayal amounts to no more than stating the bleedin' obvious:

"Sterling has devalued rapidly against the euro and the dollar. We are in danger, if the Government is not careful, of having a proper sterling collapse, a run on the pound. The danger of a run on the pound . . . is that it pushes up long-term interest rates, which is a huge burden on the economy. The more you borrow as a government the more you have to sell that debt and the less attractive your currency seems.”

It's nothing we haven't said many times on BOM, and Tyler certainly yields to no man in his willingness to roll naked in the Union Jack. It is a strange patriotism that cannot speak a blindingly obvious truth.

The fact is that the currency markets have finally remembered what Labour governments always, always, always do to the value of sterling. They shaft it.

Attlee's Labour devalued by 30% in 1948 (the $4 pound became the $2.80 pound).

Wislon's Labour devalued by 14.3% in 1967 ($2.80 to $2.40). He claimed the Gnomes of Zurich forced him into it, but in reality it was his overspending and barmy economic policies.

Wislon/Callaghan's Labour presided over a c20% fall (against our trade-weighted basket) - including the Day the Pound Nearly Died in 1976.

And now, Blair/Brown's Labour has already delivered a 15% fall since 1997 (trade-weighted).

Which is why in just the last year, sterling is down 30% against the dollar, 20% against the Euro, and 20% against our trade weighted basket of currencies. International investors have voted with their electronic trading screens. They can see all too clearly that bungling Big Government Labour has put us in a much worse position to deal with the global financial crisis than virtually any other major economy.

No wonder Brown's New Bretton Woods posturing is getting such short shrift in the informed financial press (ie not the BBC). Yesterday, describing the "Washington confab of the Group of 20 world leaders" as "the most poorly timed in history", the Wall Street Journal let rip:
"...the meeting [is] a wonderful forum for other national leaders to grab the limelight of statesmanship, real or imagined. British Prime Minister Gordon Brown has been especially voluble, yesterday suggesting that the world should pass a coordinated fiscal stimulus. "By acting now we can stimulate growth in all our economies," said the PM, without offering many details. "There is a need for urgency."

In fact, the need is for sensible, reassuring policy, and a global government spending spree financed with higher taxes or more borrowing won't stimulate much of anything save perhaps Mr. Brown's approval ratings."

Ouch.

Which brings us round to those tax cuts again.

George is quite right to emphasise the risk that unfunded tax cuts might spook the markets. As we've noted, market confidence is already in short supply, and higher borrowing could easily trigger a classic sterling melt-down. If that happened, bond yields would ramp up in fright, we'd find our fiscal boost negated by even weaker investment and consumer spending, and we'd be in even worse doo-doo than now.

So how can we get the tax cuts we need without sparking a market panic?

Yes, of course - cut spending. And in this week's Spectator Fraser Nelson gives us an excellent summary of how we could find literally billions by simply trimming Labour's spending fat.

But even we low tax zealots generally accept now isn't the best time to cut spending. Immediate tax cuts - yes, definitely. But immediate spending cuts? At the onset of a big global recession? No, not really (see this blog).

Which is why we're keener than ever on sticking with the fiscal rules. And beefing them up with the spending rule.

The only way we can hope to persuade the gnomes to lend us even more is by setting out a clearcut quantified programme for gripping our chronic spending habit. Let's start by announcing a specific target for cutting public spending within five years by 5 percentage points of GDP.

PS The real world of currency trading works like this: nobody gives a stuff what opposition politicians opine about the vulnerability or otherwise of currencies. What matters is the policies that governments pursue. To the extent that Osborne has any influence over the current value of sterling, it's because he will be the next Chancellor, and will be setting economic policy from 2010. And what he's telling the markets is that he's very worried about Labour's reckless spendthrift policies, and will likely be far more prudent on borrowing. The currency markets will like that, and if anything, they will be reassured. They will figure that the current bunch of prannocks may be replaced by someone who will restore a small measure of sanity. Of course, he'd have even more impact if he followed Tyler's advice on the fiscal rules.

Friday, November 14, 2008

Passing The Rotten Buck


The Haringey social services scandal gets worse by the day. Not only has the Council presided over at least two horrific child murders, not only have its senior managers shown a criminal disregard for their own personal responsibilities, we now hear that Whitehall ignored a specific written warning direct from a Haringey social worker, Nevres Kemal, that children were being put a risk:

"In February 2007 her lawyer wrote to Patricia Hewitt at the Department of Health as well as the junior health ministers Rosie Winterton and Ivan Lewis, and David Lammy, the local MP for Tottenham, who was a culture minister at the time, saying that measures brought in following a public inquiry into the ClimbiƩ case were not being followed.

The letters were passed on to the Department of Education and Skills (DES) - now the Department for Children, Schools and Families - which has responsibility for social services departments, and where Alan Johnson was then Secretary of State."

But all the DES did was to pass the buck to the Commission for Social Care Inspection - to whom the lawyer had already written. Needless to say, the Commission did SFA - partly because in one of Whitehall's constant rearrangements of deckchairs, its responsibilities were subsequently reassigned to Ofstead. Meanwhile Haringey Council took out an injunction against Ms Kemal banning her from speaking about their child care services altogether.

Can you believe that? It’s outrageous – WTF would any responsible Whitehall official ignore a clear warning? Apart from anything else, Whitehall despises local councils, and bosses them around all the time, so why would they hold back here?

Was it because Haringey is Labour? Maybe that played a part. But something far more fundamental was at work.

Whitehall gets bombarded with letters like this one, and routinely shrugs them off. It has equipped itself with a bewildering array of commissioners and quangocrats to whom complainants can be directed, redirected, and re-redirected for years, until they finally lose the will to go on. It happens all the time, and has done pretty well for ever (see the current BBC adaptation of Dickens’ Little Dorrit, featuring - not heavily enough for Tyler’s taste - the Circumlocution Office).

And note too that this particular letter was not a simple whistleblow – it was a lawyer’s letter that formed part of an employment dispute between the social worker and her managers. And that highlights something right at the heart of public sector underperformance – the rotten dangerous relationship between the frontline and the senior management.

It’s something that infects the entire sector, as we constantly record on BOM. In mega-departments like DWP and HMRC, years of crap flip-flopping at Commissariat level have driven staff morale through the floor. At the unfit Home Office/Justice Department, top management appears clueless as to what happens below decks. At Defra, ministers and top mandarins imperiously ignored staff advice and forced through their disastrous agricultural support system.

Some of the very worst breakdowns occur in the supposedly "caring" bits of the public sector, such as our bloated benighted NHS. A couple of years back we all watched as Commissar “best year ever” Hewitt was confronted by the nurses at their conference – a classic Ceausescu moment crystallising the total divorce between top management and the frontline. And that divorce carries right down through to the management of all the hundreds of individual NHS quangos, including our hospitals.

Local managers know their top priority is to serve the Commissars, not their customers. Safely locked away in their offices, they don't actually meet the customers, whereas the Commissars are never more than a career threatening phone call away. Naturally managers prioritise the ticking of boxes and the filling of output quotas.

But their staff have no such luxury. They are caught in the middle, answerable to the bosses, but actually having to front up to the punters. The buck stops with them. They're the ones having to somehow square the circle between half-baked wish lists handed down from above, and the grim facts of the real world. They’re the ones having to do the fudging, and having to take the abuse from an understandably angry public - remembering all the while to fill in the appropriate dockets. And all the while knowing that if they make a mistake they can expect zilch support from above.

Unsurprisingly, it’s incredibly stressful (see the Doc for how it affects just one senior GP struggling through the treacle of the NHS). Unsurprisingly, it results in many staff feeling they just can't cope any more. And unsurprisingly, it produces widespread staff sickness, numerous industrial injury cases, and tortuous disciplinary procedures.

You can see that by looking at the case law on stress as an industrial injury (eg here). We're not lawyers but it's clear that all the landmark cases involve the public not the private sector. And the very first of those cases involved... yes, a social worker:
"John Walker, a social worker with Northumberland county council, suffered two nervous breakdowns due to stress at work. He was awarded £175,000 in an out-of-court settlement in 1995, in the first successful claim for damages on stress grounds."

God knows, private sector jobs can be stressful enough. But the fact that stress only seems to throw up court cases in the public sector is telling us the relationship between its management and staff is seriously rotten.

Now, we don't know the exact circumstances of Ms Kemal's complaint against Haringey. Stress may not have been involved at all. But we do know she was pursuing a claim for unfair dismissal against the Council. The relationship had broken down.

So it's little wonder that her letters failed to register in Whitehall. They would simply have been stamped "another troublemaker", and dropped straight in the gigantic WPB already bursting with countless other such missives.

Crass dysfunctional top-down Big Government will grind down anyone unfortunate enough to fall into its path.

PS According to the HMT analysis, we currently spend about £7bn pa on personal social services for families and children. That's a fair chunk, and as far as we can see (still checking fine print), it's virtually doubled in the last decade. Yet from everything we've heard in the last 48 hours, the incidence of child murder by feckless parents has not changed: it remains at about 50-60 pa. Yes, we know social workers do other stuff as well, but it does make you wonder what we've got for all that extra dosh.

Thursday, November 13, 2008

How Much Pain?


Much coverage this morning of the latest Bank of England Inflation Report. In particular, their big dipper GDP forecast (above). Unfortunately - scary though it looks - it seriously understates the likely pain we face.

The Bank forecast envisages a short sharp recession, with a maximum total fall in GDP in the range 2-3%, and recovery back to the starting GDP level within about two and half years (ie late 2010). But previous recessions since WW2 have been worse than that, and they weren’t triggered by the worst financial crisis in history.

The following chart shows what happened to GDP in the three previous recessions, tracing the quarterly path from the onset of the downturn through to the quarter in which GDP recovered back to its starting level. The conventional definition of recession emphasises the down leg – the quarters while GDP is actually contracting – but it’s also important to remember we still remained poorer right up to the point when we’d clawed back the whole loss.



As we can see, the shortest of the recessions was the first, which lasted from 1974 to 1976. At its worst point, GDP was a chunky 4% below the starting level. The slide was triggered by the first oil price hike, although with our "sick man" economy and chronically lax fiscal and monetary policy, we'd been an accident waiting to happen. It culminated in the collapse of sterling and the humiliation of the IMF loan, with Uncle Jim Callaghan telling us in all candour that we could not spend our way out of recession.

The second shortest was the 1990-93 recession, and interestingly, it was also the shallowest: the maximum GDP loss was "only" 2.3%. The problem, and why it felt so much worse, was the length of the down leg. It was drawn out over a miserable two years, which rendered Norman Lamont’s constant "green shoots" refrain sound ridiculous and even insulting. It took over three years to get back to our starting point.

The worst post-WW2 recession by far was 1979-83. At its trough, nearly two years in, GDP was down by more than 6%, and it took an extraordinary four and a half years to recover back to our starting point. It amply explains why Thatcher will always be seen across large swathes of Britain as the epitome of evil.

Now, all three of these recessions were different, but taken together they do suggest the Bank’s current forecast is optimistic. So what’s going on?

The answer is that the Bank is assuming... hoping we'll be saved by the massive fiscal and monetary boost now underway. And indeed that is very different from the policies in place during the previous recessions. On all three previous occasions, policy had to be kept tight to whack domestic inflation, and (in the 70s and early 90s) to defend the pound.

Will the Bank's hopes pan out?

Nobody knows. But with our busted banks, and our animal spirits gone walkabout, we're not holding our breath.

The 2010 election will be held in a world of pain. A world in which the winner will scratch around vainly for any growth to share.