Friday, July 31, 2009

So What Would You Cut?

Equipped for every eventuality

Following yesterday's post, a number of correspondents have suggested to Tyler that he can't criticise Cam's lack of clear surgery plans unless he says what he'd cut himself.

As it happens, Tyler is currently working on a detailed cuts package with some like-minded fiscal patriots. We hope to publish it after the summer hols so we'll keep the powder dry until then.

But in the meantime, we might remind ourselves of the cuts package assembled by the excellent Reform (we blogged it here).

Entitled Back to Black, their report identified £29bn of cuts for 2010-11. It featured some highly contentious items:

  • Abolish universal Child Benefit. Instead Child Benefit should be targeted on families on low incomes. Saving: £7.1 billion (after making allowance for additional expenditure of £5 billion on the poorest families).
  • Reduce the pay of doctors and NHS managers by 10 per cent. NHS pay rocketed in the middle years of this decade, far above the average rate of pay growth in the economy. NHS pay rises are already falling as the service returns to sanity, but not yet far enough. Saving: £1.3 billion.
  • End inappropriate defence projects. Several projects (the future carriers, Eurofighter Tranche 3b, A400M and Nimrod MRA4) do not contribute to the UK’s modern defence requirements. Saving: £2.7 billion.
  • Abolish the Regional Development Agencies and the regional assemblies. Saving: £1.6bn pa
  • Remove pensioner gimmicks, such as the winter fuel payment and free TV licences for over-75s. Saving: £3.2 billion.
  • Introduce market rates for interest on student loans. Saving: £1.2 billion.
  • Scrap Train to Gain and Skills for Life programmes. Saving: £1.5bn

They make a number of other proposals, including axing various quangos. Their overall cuts stack up to £29bn in 2010-11, as follows:

In the dire circs in which we find ourselves, these are all eminently sensible suggestions.

And we can see some common themes that we are going to hear a lot more about over the next year.

First, the curtailment of middle class welfare. Or to put it another way, the end of universal benefits and a return to welfare as a means-tested safety net for the genuinely poor.

Second, pay freezes/cuts for public sector workers. And that will include addressing those index-linked final salary pensions we hear so much about.

Third, an all-out assault on quangoland - ie outright abolition for many.

But alarmingly, the Reform cuts don't go far enough. In Tyler's view, we need to find at least another £20bn pa. And a gap of that size will require the kind of emergency surgery we haven't experienced in years.

Which brings us to an issue that even true blue fiscal conservatives disagree about.

To bridge our cuts gap, we have two broad options.

First, we could simply starve the beast - ie implement across the board budget cuts driven by our overall savings target, rather than any specific central programme decisions. That has the advantage of putting the onus on spending departments/agencies to decide how best to make savings, the idea being they are closer to the sharp-end so can make more informed choices.

Unfortunately, the beast has never shown itself particularly adept at making sensible choices, as we saw with the ludicrous Gershon "efficiency cuts". It's quite likely, for example, that the healthcare beast would make savings by simply cutting down on the treatment offered to patients (aka voters).

The alternative approach is the comprehensive programme review process apparently followed in Canada, and advocated by Andrew Haldenby - the very excellent head of the very excellent Reform - himself. As he puts it:

"The wrong course of action would be the kind of panicky, unplanned cuts that we have seen in Britain many times before. This is exactly what people in the public sector are expecting: a crude reduction in their overall budget, in the form of an order from on high to cut spending by a certain arbitrary percentage...

...however appealing it sounds, this would be the wrong approach. Faced with an overall cut in their budget, public-sector leaders will tend to reduce their wage bill by cutting back on higher salaries – getting rid of the most experienced and capable staff. They will also reduce the number of administrators – firing secretaries, for example – but that just forces other staff to waste time on administration. In fact, this kind of approach would make public services less efficient – which is why it hasn't worked in the past."

Now, we do have sympathy with Haldenby's point. It would be far preferable to implement cuts that are directly related to specific policy choices (like the abolition of the Regional Development Agencies). If we can do that, we should.

But unfortunately we may not have time to decide all that: the markets are expecting quick action following the election. And if the 60s and 70s taught us anything it was that new governments need to get on the front fiscal foot quickly. Like, in the first budget quickly.

Cam and Osborne need to deliver a Big £50bn plus Cut straight off the bat next June. It is essential they are seen to grip the problem.

All well and good if they've already worked out £50bn's worth of specific programmes to ditch. But judging from what we've heard so far, we doubt that they will have.

In the circs, the gap will simply have to be filled by blanket cuts.

Of course, Cam and Oz also need to do something else, just as important.

Because any fool can cut public spending. The important longer term question is having made the cuts, how do you then get the public services to perform?

Which is why Cam needs to be much bolder in public service reform.

School vouchers, competing social health insurers, elected sheriffs... we all know the score by now. Post-cuts they will be more important than ever. They offer the only way we can hope to make less go further.

Come on Cam.

You know you are going to win a crushing election victory. But you surely also know you are inheriting a world of pain.

On the back of the biggest spending cuts Britain has ever experienced, the only way you will be able to offer genuine hope is by announcing that reform package you stuffed somewhere in the depths of your desk.

And if you've forgotten where it is, may we suggest you give Mr Haldenby a buzz?

Thursday, July 30, 2009

Canadian Cutting Lessons

Very good... but I'm not sure we've got time for the songs

How is Cam's government-in-waiting actually going to cut public expenditure?

We and many others have been fretting about this for years, but the size of the necessary cuts is now larger than even our worst fears. Somehow, he's going to have to find cuts of at least £50bn pa - and soon.

So what's he actually going to do?

We have no idea. On Sunday's "Andy Marr Show" he once again dodged the question, preferring to mention the things he's not going to cut, like the NHS.

In fact, the only three cuts targets he identified were Labour's regional government infrastructure, ID cards and the NHS Supercomputer. Scrapping the first (as long recommended by the TaxPayers' Alliance) will save some useful money, but as Cam presumably realises, scrapping the others will save next to nothing.

That's because the bulk of the projected £5.3bn cost of the combined Biometric passports/ID cards project is going on the passports - which apparently we must have. Scrapping the ID cards element alone would save at most a few tens of millions pa.

There may be more scope on the Supercomputer, but as the Public Accounts Committee recently discovered, the government's brilliant contracts with its IT suppliers commit us to paying them whether or not all the local health trusts use the system. So at this stage, scrappage savings are likely to be relatively small (gah!).

Cut waste and inefficiency? For as long as Tyler can recall, new governments have come to power pledging to eliminate the waste and inefficiency that built up under their predecessors. And for as long as Tyler can recall, they have failed.

Cam needs some serious input from somewhere. And fast.

Enter the Canadian cutters from the 1990s.

You are probably aware of the story by now, but in brief, over several decades Canada had developed a chronic fiscal deficit (see here for overview). By the early 90s its public sector debt burden had reached nearly 100% of GDP (Federal plus provincial deficits), debt servicing costs were rising, and the situation was becoming unsustainable.

But at that point, a new Federal government was elected, and - miracle of miracles - it actually managed to get a grip. It cut spending, and returned Canada to fiscal surplus for the first time in a generation:

A fantastic job, and an inspiration to us in our current difficulties.

But how did they do it?

Recently, one of those involved - Jocelyne Bourgon, former Clerk of the Privy Council of Canada - explained to a seminar at the Institute of Government. You can watch a video of her talk here (well worth doing), but in essence, her advice to Cam is:

  • Avoid across the board cuts - they often have perverse effects, erode public service quality, and undermine public confidence
  • Don't set departmental cuts targets - you need to encourage clean-sheet-of-paper thinking
  • Don't rely on efficiency programmes - they will never ever deliver enough to dig us out of a fiscal hole as big as ours
  • Do conduct a comprehensive bottom-up programme review, with the spending departments in the driving seat - they are the people with the knowledge of what programmes are essential and what can be scrapped, combined with the understanding of how things can be done better and more cheaply
  • Do operate as a Team - politicians and civil servants all pulling together towards the common goal of tackling the fiscal problem

To which Tyler's response is Wow!

You mean there are government spending departments elsewhere in the world who are prepared to offer up big savings even though their "colleagues" in other departments are not necessarily doing the same? That must be fantastic.

The trouble is, here in blighty, that has never been the case. Here in blighty, public spending has always been decided by the age-old principles summarised in 1983 by Sir Douglas Wass (Joint head of the Civil Service and Permanent Secretary to the Treasury):

"Number one: as things have been, then broadly so shall they remain.

Number two: he who has the muscle gets the money."

Not that Canadian-style fundamental bottom-up programme reviews haven't been tried. Back in 1970, ace managerialist Ted Heath introduced a whole new system of resource management called Programme Analysis and Review. It was going to bring rationality to bear, and sweep away Wass's stone age system. Needless to say, it was a complete flop.

No, to get anywhere, Dave's going to have to impose his own muscle (especially since he can't find big cuts by simply slashing grants to the provinces, thus passing the problem onto them - which is pretty well what the Federal Government was able to do in Canada).

The required cuts are much too big to wait for a rational consensus among spending departments. Much more helpful is the somewhat cruder advice from Ronald Reagan's Budget Director: "starve the beast".

It's brutal, it's bloody, but it has to be done.

PS Mrs T's father learned how to cut down trees - scary Big Trees - as a teenager in Canada. And he was still felling them for friends and relations here in Britain well into his eighties. Cutting is a skill that, once learned, lasts a lifetime.

Wednesday, July 29, 2009

Purge The Treasury

The sudden departure of John Kingman, head of UKFI (the Treasury offshoot running all those bank shares we own), underlines a very important point: when he walks into HM Treasury next May, George is going to be a very busy boy.

Because as an experienced business turnaround specialist put it to Tyler recently, George can forget all about those mythical 100 days.

He's got 10.


He's got just 10 days to take The Big Bath, frame and trail the massive spending cuts to come in his June budget, and most of all, assemble a team around him that he can depend on.

Kingman clearly understands this. As one of the senior Treasury mandarins who thrived under Brown, he is quite capable of reading the score. And very sensibly, he's decided to take an early bath.

As we've blogged many times, Brown's politicisation of the Treasury has been comprehensive. Gone are the redoubtable fiscal conservatives of the Old Skool Tyler so admired when he worked there. In their place, Prog Con careerists whose advancement has been built entirely on serving the cause of Big Government NuLab.

Just last week, these very people cobbled together an entirely spurious figure of half-a-million jobs Brown/Darling have supposedly saved through their fiscal recklessness. Pure political spin.

George can't possibly succeed with a team like that. He needs to wield the axe as soon as he arrives. He needs his own team, who are committed to the cause, and in whom he can trust.

Yeah, sure, it would be great if we could go back to the traditional Northcote-Trevelyan service of apolitical incorruptible Oxbridge double-firsts. But we can't. We have to get real.

George doesn't have time to muck around. Our fiscal problems are pressing, and the financial markets are expecting early answers.

10 days, George.

Barbecue Summer Meets The Funnel Of Doubt

How come nobody mentioned the funnel?

Just for fun, let's see if we can work out the relationship between the following four statements:

1. "The coming summer is 'odds on for a barbecue summer', according to long-range forecasts. Summer temperatures across the UK are likely to be warmer than average and rainfall near or below average for the three months of summer." (Met Office press notice 30 April 2009)

2. "You will need a brolly on holiday in the UK in August - the Met Office is issuing a revised forecast for more unsettled weather well into the month. It is a far cry from the "barbecue summer" it predicted back in April. The news will raise questions about the Met Office's ability to make reliable seasonal forecasts." (Roger Harrabin, BBC environment analyst, 29 July 2009)

3. "The BBC has held a high-level seminar with some of the best scientific experts, and has come to the view that the weight of evidence no longer justifies equal space being given to the opponents of the consensus." ("Safeguarding impartiality in the 21st century", BBC Trust Report 2007, justifying the BBC's overtly partial coverage of global warming; and see here).

4. "What of the... corridor of uncertainty? It must be related in some way to the ‘expanding funnel of doubt’ of which we hear so much in our line of work. Perhaps... ‘corridor of uncertainty’ is a generic term, used to describe a ‘funnel of doubt’ whose expansion/contraction properties are less well defined?" (The Actuary, 1 April 2005)

You see, the thing is, if the £180m pa Met Office's three months weather forecast is no better than than the flip of a coin, HTF can they possibly reckon to forecast our climate 50-100 years ahead? And given the rain lashing down on the barbecue, how can anyone possibly believe they are capable of that?

Admittedly, Tyler is no scientist (although I dare say he knows more about number krunching than the BBC's Environment analyst, who has an English degree). But in all the many forecasting exercises in which Tyler has been involved over the years, there is always this thing called the Funnel of Doubt.

The Funnel starts out nice and narrow - anchored to what we understand as today's reality.

But as you extend your forecast further into the future, the funnel expands rapidly. Known unknowns bombard the forecast from all sides, so that by the time you've got out a couple of years - at most - the funnel is so wide you're pretty well back to coin flipping.

A typical example is this chart showing 20 year projections of US government bond yields, ranging from roughly zero right up to 14%:

And that's without even considering the unknown unknowns, which have a nasty habit of cropping up... well... unknowably. You can't even model them.

The bottom line is that once you crank your forecasts out beyond the hand in front of your face, they are pretty well fiction. To be taken with a huge pinch of salt.

So what of that sodden barbecue?

According to Mr Harrabin:

"Some now ask if the Met Office risks its reputation by attempting to popularise its work this way. Certainly, at the time of the forecast there was pressure on the Met Office from tourism chiefs in the UK to be positive about holidays at home. Did Met Office staff feel an obligation to put on a sunny face?"

Actually, Roger, some of us are now asking a lot more than that.
Some of us are now asking why we taxpayers are stumping up £180m pa for a quango that has become the world's biggest producer of eco-doom fiction?
And yet more of us are asking why we are paying another £3.5bn pa quango to report such fiction as reality?
It's time we were treated like grown-ups. We don't believe any "experts" know what's going to happen to our climate a century from now. Still less do we believe they can justify the massive eco-costs they are now imposing on us.
Where there is doubt, let us see that funnel reported openly and clearly.

Tuesday, July 28, 2009

For Richer For Poorer

A previous Tyler family Big Hat Fest

The bride dazzled, the sun shone, the champagne flowed, and our son's wedding was just about as perfect as it could be. The Tylers have gained a wonderful daughter, and have at least doubled the size of their extended family.

Weddings are one of life's great set-piece events, and old-fashioned people like the Tylers think it's important to do them properly.

It isn't just the formal business of the day - the families gathering to bear witness to their children repeating those age-old but always moving marriage vows. And it isn't just the celebration itself, or even the wedding album (the Brag Book as the photographer insisted on calling it) - brilliant though they may be.

No, over and above all of that, there's something even bigger: weddings are a reaffirmation of family ties, stability, and continuity. And at a good wedding, that reaffirmation touches everyone there, as we hope it did on Saturday.


Of course, being an economist, Tyler's mind is never far from money matters. And a wedding in the midst of recession naturally highlights the thorny issue of for richer and for poorer.

We're not talking here about the cost of the wedding itself - these things cost what they cost, and it was worth every single penny.

No, the issue that troubled Tyler was one particular relation whose previously thriving small business has recently folded. He and his family did not come, even though they have attended almost all previous such events. We fear he simply could not face the questions/sympathy/gloating he imagined he'd find. Or maybe it was the cost.

Either way, it was a great shame. But it does underline just how risky it is to be an entrepreneur.

Everybody knows about the entrepreneurs who end up making a fortune, but the vast majority never do. In fact, according to survey evidence, well under half survive even four years. And when we remember that most are dependent for initial funding on their personal or family resources - including second mortgages - we can see that their personal risks are much higher than those of an employee.

As it happens, today sees the publication of a new paper from the TaxPayers' Alliance on just this issue. Snappily entitled Tax and entrepreneurship - How the tax system impedes the creation of new firms and decreases employment, it was written by Matt Sinclair, the TPA's Research Director, and Dr Jonathan Scott, a Fellow at Queen’s University Belfast and a specialist in entrepreneurship and small firms. There's also a forward by a real live Dragon from the scary Den - Julie Meyer.

The paper runs through some of the evidence on what drives entrepreneurs, how they fund themselves, the risks they run, and their vital role in Britain's future prosperity.

It then focuses on our tax system, and how that increasingly penalises entrepreneurs:

"The tax system affects the decision over whether to become an entrepreneur in two key ways:

  • It may reduce the amount of capital they can access from their own wealth or their family. In particular, existing research suggests that receiving an inheritance leads to higher levels of self-employment. Inheritance Tax, in particular, may reduce the extent that entrepreneurs can obtain finance without the risks that come with a bank loan.

  • The tax system undermines the large rewards that justify the risks attached to starting a new

The paper points out that entrepreneurial earnings can be taxed several times over.

For example, money that is earned is taxed as personal income. Then, if that net income is invested in a start-up company, any earnings will be taxed at the corporate tax rate. Then, if the company is finally sold, its value will be taxed as capital gain. And finally, any residual value passed on to the next generation will be taxed at the IHT rate.

For most entrepreneurs that currently means 40% personal tax times 28% corporation tax times 18% capital gains tax times 40% inheritance tax. and compounded up over a lifetime, the TPA calculates that comes to an eye-watering total tax rate of over 90%.

We're right back to Denis Healey pip-squeaking territory. It's more than enough to make any rational entrepreneur take the first plane out.

Worse, rather than tackle the problem, this government has actually made it worse. The top personal tax rate is soon to increase to 50%, which means that the overall compound tax rate on entrepreneurs will shift up to 92%.

It's a great pity our struggling relation didn't come on Saturday. Nobody would have been chortling. We'd have been advising him to get out and try again - maybe here. And we'd still invite him and his family back to all the weddings.

For richer or poorer.

PS Many thanks to BOM readers for all the good wishes you sent. The day could not have gone better, and those of a certain age are already counting the grandchildren.

Friday, July 24, 2009

Bucking The Trend

We Tylers are off for a weekend of bearing witness, toasts, and big hats. Our elder son is getting married, and we are delighted.

These days of course, getting married is pretty well a minority pursuit. We now have the lowest marriage rates since they were first calculated in 1862. The number of first marriages has halved since the early 70s, when Mr and Mrs T got shackled.

Does it matter? Will the relationship between our son and his fiancee be strengthened by their marriage?

Actually we think it will be, but in truth that's more about them than the institution of marriage per se. They've already been together for 8 years, and they're now making a very public statement that they intend to stay together. And - famous last words - from what we know of them, it will then take an atomic bomb to split them asunder.

As for marriage more generally, it's not at all clear that more marriages would necessarily mean more stable homes for Britain's kids.

But let's not think about that today. The sun has just broken through, and tomorrow's forecast is good.

Time for Mrs T to climb into her big hat.

Thursday, July 23, 2009

Fear And Loathing At The Audit Commission

One of these men will soon be looking for a job

We know all about the fear and loathing it induces in Surrey, but the Audit Commission spreads its bureaucratic misery far beyond the leafy enclaves of Guildford and Dorking.

On BOM we have generally focused on its £210m pa cost, pointing out that taxpayers get no tangible benefit. But it's actually much worse than that.

The Commission is an instrument of central control, and just like government inspectors throughout history, its activities leave a trail of devastation across all the local organisations they inspect.

Now John Seddon - the occupational psychologist and "reluctant management guru" (right pic above)- has penned an excellent article for the Local Government Chronicle in which he pins down precisely why the Commission is so damaging:

"... the Audit Commission fosters compliance rather than improvement; and compliance with bad ideas to boot...

...they descend into our public services and distort the way services are designed and managed – ensuring people are focused upwards to the regime, not outwards to their customers.

The Audit Commission is just part of the wider specifications industry – the army of people in Whitehall who spend their time creating specifications for public-sector managers’ compliance.

Getting rid of all of them would create two savings: The money it costs to have these jobs (significant) and the waste caused by complying with their wrong-headed ideas (much larger)."

And he goes on to illustrate his argument by highlighting the latest Whitehall fad being promoted by the Commission, which is to combine back offices across different bits of the public sector in order to reap "economies of scale".

Not only has the government adduced no serious evidence that this will work, but in the private sector such "scale economies" in service functions are now widely viewed as a myth - they promised much, but have often delivered little, other than a drastic deterioration in service standards (have you tried speaking to your high street bank lately?).

Seddon's article has triggered an explosion of supportive comments from LGC readers who've actually experienced the real world damage wrought by the Commission. You should read them, but here's a taster:

"I am a manager at a Local Authority that was inspected last year. My organization spent over £100,000 on preparation for inspection not including staff time. When the Audit Commission came they gave us a reasonably good score. My colleagues and I know that we manipulated the targets and that service is pretty poor. Although using the centrally imposed targets and measures you wouldn't be able to tell.

When they came they didnt go and spend time with people working on the frontline. They didn't listen to calls. They sat in a room with the policies and procedures and asked staff questions against them. Seddon is right. They enforce the government line, and their decisions are based upon guesswork more than fact and knowledge."

Now the debate has been been lifted to another level by a fear and loathing outburst from David Walker, the Audit Commission's Director of "Communications" (left pic above). Of course, BOM readers will be familiar with Walker*. He used to be editor of the Guardian's Public magazine, and we first met him at a Labour seminar back in the halcyon days of 2005 (appearing alongside his partner, one Ms P Toynbee).

Walker's response to Seddon's arguments? Seddon has got his facts wrong, he has a commercial axe to grind, and he's incontinent. Yes, incontinent:

"Mr Seddon is incontinent in his judgement. To say ‘economy of scale is a myth’ betrays what can best be called a religious rather than an empirical mind set. For us, it’s a matter of what the evidence shows. Unit cost and volume (quality adjusted) are inversely related in some services."

A classic Damien MacBride/Grauniad style playing-the-man kick in the goolies.

Needless to say, Walker doesn't actually vouchsafe what "evidence" he's got. It's presumably some secret commissariat evidence that can't be released - because we've certainly never seen it.

Let's hope that Mr Seddon keeps up the pressure. Yes, he may have a commercial axe to grind, but so what? He's talking a lot of sense about the Audit Commission. At the very least, its abolition would save us a couple of hundred mill pa, and as the comments at LGC make clear, the broader savings across local government and the NHS could easily be the same again.

It's a no-brainer, George. And we could be talking nearly half a bill.

*PS Here's how we summarised Walker's performance at that gob-smacking Policy Exchange seminar back in 2005:

"I’d never seen him before, but he turns out to be a real live Planning Commissar - steel grey hair, thin intense face, and round wire rimmed glasses. He was very proud of all those targets and New Labour statistical reporting systems. “Targeting works! Previous governments have not set enough objectives or provided enough information! An amazingly successful government - the most successful EVER!” He spoke of ‘physical expansion of the plant’, and was about to launch into a couple of hours on production statistics for Volgograd Number 4 Tractor City, when mercifully he was stopped."

Once the AC is abolished, he'll have to go back to the Grun. That is, if they're still in business once Murdoch's finished with them over their News of the World campaign.

(Playing the man not the ball? Yes, but I'm a disreputable blogger, not a senior public employee funded by the taxpayer).

Free Tamiflu

Question 1 Do you feel lucky? Yes/No

So can anyone think of a good reason why millions of us will not hit the new NHS Tamiflu hotline and grab our personal supply while it's still available?

According to the BBC's health correspondent, you just go onto the new website, answer a few questions, and get your free Tamiflu voucher.

So given that there's not enough to go round, why wouldn't you do it on Day One?

The official answer from the Chief Veterinary Officer seems to be that doing that "wouldn't be right".

Er.... yesssss.

The only slightly more convincing answer given by Peter Holden, lead expert on swine flu for the British Medical Association is:

“There is a danger that we will give Tamiflu out too easily.” Tamiflu is associated with side-effects, including diarrhoea, vomiting and hallucinations, “so with just mild symptoms, very few people actually need it."

In other words, the drug is often worse than the disease, so I advise you to steer clear.

Except that if you're literally at death's door with swine flu, you're certainly going to risk the side effects of Tamiflu. So you're best bet is still to get some in before it runs out.

And even if you don't use it, you can always sell it online.

The current market price for a pack of 30 is $177.41. God knows if that's real Tamiflu, but as the epidemic spreads, desperate punters won't be asking too many questions. In fact, Tamiflu has already taken over from Viagra as the most spammed drug on the internet.

Of course, in reality you probably won't be able to do any of this. In reality, the Tamiflu hotline will be jammed with calls in seconds, and the website will fall over. You won't be able to get through.

The Tamiflu hotline - an NHS fiasco in the making.

Another one.

Update: The Doc has now delivered his definitive verdict: "I can prescribe Tamiflu, though as yet I have not. I would not take it, and I would not give it to my family, so why would I prescribe it for patients? What this means is that anyone with any vaguely viral symptom is going to get "treatment" for a condtion they probably do not have with a drug that is next to useless and may have hitherto unexpected side effects. Great!" So now we all know. Hope he's enjoying his hols and that he's staying away from the Welsh porkers.

Tuesday, July 21, 2009

The Major On Mobility

Sometimes the Major can be quite blunt:

"I'm sick to death of all this claptrap on the BBC about so-called social mobility.

I mean, look at you, Tyler. You're pretty well from the absolute bottom of the heap. You've never played polo, you've never been on the grouse moor, you don't hunt. What's more, you have no social polish whatsoever - in fact, when you're at home, I'll bet you still eat peas off your knife. Yet, despite all that, I'm quite prepared to treat you as an equal... well, virtually an equal, anyway. So what's the problem?"

Tyler winced. "Well, Major, the problem is that people like me are a dying breed. I may have grown up on a council estate and risen through the social ranks to my virtually equal status with you, but these days it's much more difficult. According to today's report from the Right Honourable Alan Milburn MP - who incidentally grew up on a council estate and rose through the ranks to become a cabinet minister - kids on today's council estates have absolutely no chance of moving up to become your nextdoor neighbour."

"You know why!" the Major spluttered, fortifying himself from the silver regimental hipflask that had been presented to his great grandfather after the relief of Montmorency. "Those socialists abolished the grammar schools - that's why! I mean, for the village children, those grammars were a godsend! Once they'd gone, the ladder was kicked away!"

Tyler sighed. "Yes, Major, you might well say that. But as it happens, I've read the Milburn Report, and it doesn't mention the abolition of the grammar schools once. Not once. So it can't possibly be that."


Milburn's 167 page report repeats some very familiar themes. Social mobility in Britain seems to have fallen over the last few decades, and the top jobs seem increasingly to go to the children of parents who are already in the top jobs. Which is much less the case overseas.

The first thing to note is that Milburn directly contradicts the previous official line, which said that social mobility is getting better under Labour (eg see this blog). They now admit it's getting worse.

Second, as per, the evidence for any sweeping conclusion is incredibly flimsy. As we've blogged before, defining social mobility in terms of whether children move "up" from the manual occupations of their parents to the non-manual occupations of today, totally fails to recognise structural change in the economy. In the 40 years following WW2, there was a huge shift from manufacturing employment (largely manual) to service employment (much of it defined as "managerial and professional"... a plumber or a gas fitter is not professional?). So unsurprisingly, there was a one-off surge in "social mobility".

Third, people have been banging on about social immobility as long as Tyler can remember. Leafing through lefty journo Anthony Sampson's New Anatomy of Britain (1971), Tyler finds Sampson bemoaning the fact that 81% of Britain's judges went to public schools. And four decades later, Milburn makes exactly the same point... only now the percentage has fallen to 70%.

I dunno... what are we to make of it?

Is it surprising that kids who went to our customer-driven independent schools do so much better on average than kids who went through our dumbed-down, target driven, state education factories?

Is it surprising that the children of economically successful parents do so much better on average than children of less economically successful parents?

Er, no.

But there is one thing about which I am 100% certain.

Gove really, REALLY, MUST push through his plans for school vouchers and independent schools.

Even with all our fiscal problems, Gove's school reform is by far the most important legacy Cameron's government could leave to future generations.

It is something that could rewrite our history.

Stuck Up Queer Street Without A Golden Goose

All that remains from the fat years

The latest public borrowing figures are worse even than Tyler expected.

Last month the government managed to borrow £13bn, taking the total for this financial year to £41.2bn - twice the comparable figure for last year. It tells us that borrowing for the year as a whole will almost certainly be over £200bn, rather than the £175bn forecast in the budget.

As for debt, we've already reached 57% of GDP, well on the way to that scary 100% level - and that's on the government's own massaged definition (the same measure was at 40.6% in 1997).

So how did we get here?

Well now, you'll have to pay close attention to this next bit because it is very technical and incredibly difficult for ordinary people and government ministers to follow. Most of the time, only Highly Trained Economists like Tyler can grasp it.

You see - now concentrate because I'll be asking questions later - the government has been spending more than its income.

Get that? Its spending exceeds its income.



OK, let's try to make it nice and simple with a picture. Here's a chart showing government expenditure relative to government income since 1997 (totals over previous 4 quarters):

Now, look at it carefully. Can you see how for a few years after this government came to power, they more or less kept income and expenditure in line?

And can you see how in 2001-02 they stopped doing that, and instead let their spending rip well ahead of their income?

Now, children, do you know what happens to ordinary people when they do that?

Yes, that's right - they end up in Queer Street. And they have to sell their own body parts for a few pence simply in order to eat!

But some people - notably the present government - used to think that couldn't happen to governments. They used to think the government could always get more money from a Golden Goose called The Taxpayer.

And for a few years, it seemed to work. Spending was running well ahead of income, but the Royal Goose Master stuffed the Golden Goose (aka the financial and property markets) so full of special high octane corn, that egg production kept growing.

Then one day, the Goose could take no more. By now monstrously fat, with a hugely engorged liver, the poor thing waddled out into the middle of Canary Wharf and exploded. Bang! Just like that.

Which is why the government's income is now plummeting (see pic).

So what is to become of us?

Nobody knows.

But what we do know is this clothead government has no serious ideas whatsoever. In fact they are hiding under the stairs in the Royal Goose Master's house trying to ignore the latest crop of disasters:

  • Collapsing tax revenues at HM Revenue and Customs - down £32bn last year
  • £140m error in MOD's accounts
  • Rising losses to tax credit fraud and errors - now up to 8.8% of claims
  • Unauthorised £24bn bank bailout by HM Treasury
  • £1.5bn on another useless training scheme (Train to Gain)
  • etc etc

All we know is that we have another nine ghastly months of this.

Monday, July 20, 2009

Rule By Amateur

Keep them well away from this

As we've blogged many times (eg here), despite more than a century of promised reform, the governance of Britain remains firmly insecurely in the hands of bumbling amateurs. For reasons that defy all logic, we continue to entrust our security and half our national income to a bunch of incompetents we certainly wouldn't trust to run the family whelk stall.

In the last couple of days we've had two further prime examples.

First, our late grate Home Secretary confessed she was never up to the job. She told us she'd "never run a major organisation" before being appointed, and that her relevant job skills were so poor she'd operated "more by luck than by any kind of development of those skills".

More broadly, she reckons the constant reshuffles make it impossible to pick up the skills and knowledge on the job, so that cabinet government is "pretty dysfunctional in the way that it works".

At least she now recognises her own shortcomings. But the big question is why anyone ever thought it was OK to put her into the job in the first place? Tesco wouldn't dream of appointing a CEO who knew nothing about running a big organisation - let alone someone who also knew nothing about the supermarket business.

The answer is staring us in the face - Jacqui's story is simply par for the course. In government it's perfectly normal for cabinet ministers to be heading large complex organisations without having a clue how to run them. Or having a clue about their business.

No other walk of life would or could operate like that.

But government does.

And then there's the case of Trevor Philips at the Equality and Human Rights Commission.

As BOM readers will know, Philips presides over a £70m pa superquango that is a complete and utter shambles (see previous blogs, eg here and here). And now, not only are his head honchos resigning in droves because they can stand no more, but the National Audit Office has refused to sign off the accounts.

The NAO says the Commission failed to follow due and proper processes in the matter of re-hiring as consultants seven senior staff members it had previously made redundant from the permanent staff. A matter that seems to have cost taxpayers around £1m.

None of this comes as a surprise to BOM. After all, Philips is clearly not someone any of us would trust with a £70m budget - even in the unlikely event we wanted to retain the EHRC (another one for George's list).

But as we pointed out when he first got the job, as a longtime Labour insider (Mandelson was his best man) he can count on support in all the right quarters. And in those quarters it doesn't matter that he is organisationally inept - he's one of them.

So what's the answer to rule by amateur?

It's certainly not what My Lord Digby-Jones proposes, which is to put Britain in the hands of highly experienced super-managers such as... well, such as his good self. If we're going to have anyone ruling us, I'd like to be able to kick them out, thank you very much.

No, the only viable long-term solution is to reduce drastically the area over which these amateurs hold domain.





PS His Grace Bishop Snow was in outstanding form this evening. His opening line was "C4 News has learned that the Prime Minister Gordon Brown intervened personally to secure Nissan's new battery plant for Britain!" He then proceeded to open his pulpit to My Lord Mandy so that the good Lord could "make no apology" for achieving such a miracle of deliverance for Sunderland. Here endeth the lesson. Praise be to the Lord.

PPS The 40th anniversary of the first moon landing? Nah, it can't be... why, surely it was only yesterday, wasn't it? Anyway, it's reminded Tyler of another feature of life as a junior civil servant at the old Department of Education and Science back in the early 70s. Just a few years after that historic landing, Tyler and his fellows were able to sneak off down to the basement of the DES for a game of Lunar Lander on the department's mainframe ICL computer. Nobody ever seemed to mind (or even check), though we sensed it wasn't quite what the huge and expensive contraption had been purchased for. The only problem was that you had to input all your landing moves via punched tape, which then had to be transmitted over a landline to Darlington where the beast was housed. Its mighty brain then had to crank up - draining large parts of the National Grid in the process - until eventually it calculated where your moves had placed the lander relative to the lunar surface. Then it had to dial up the phone in the London basement to activate the teleprinter, which then printed out the answer. You then had to repeat the entire process again and again as you attempted to land. Fun though it was, the game did lack a certain immediacy. And Tyler never did manage to land succesfully. Wonder if it still goes on.

The Public Teat

£700bn feeding frenzy

His Extreme Eminence Bishop Hill has managed to get some fascinating information out of the Department for Children Schools and Families (DCSF). It's a spreadsheet listing all the individual payments that went into the department's £66bn spend last year (see here). And it makes for a riveting read.

His Grace has been busy combing through it and highlights a number of payments going to some of BOM's oldest friends. You should read his post, but here's a taster:

  • Guardian Media Group - £1.1m.
  • Gypsy Media Company - £7,500 ("Britain's only media company run by and for Gypsies")
  • Consultants -£28m
  • Cap Gemini £44m
  • Crapita £132m
  • BBC's Mike Baker - £2,643

Etc etc

This is the first fruit from a much bigger and altogether splendid project the Bishop has underway:

"This would look at those companies that were living off the taxpayer. It would essentially be a searchable database, where you could look up how much a company was raking in from which bit of the state. It would be called The Public Teat."

Of course, in theory, George will be launching just such a searchable spending database when he becomes Chancellor. And it's something we've long called for on BOM (eg see here).

But His Grace isn't prepared to wait for all that - he needs Action This Day.

So well done to him.

And let's hope he can get the comparable info out of all the other spending departments. We need to know precisely who's getting all the billions we pay in taxes every year.

Sunday, July 19, 2009

Fear And Loathing In Surrey

A typical weekend in Guildford

Tyler lives in Surrey.

Well, he would, wouldn't he. Surrey is nice and leafy, yet close enough to the fleshpots up the Smoke.

True, Surrey has been described as Britain's biggest carpark, and Surrey housewives are not to everyone's taste. But it's also got more Waitroses than anywhere else outside London, and important National Treasures like Cliff Richard live here.

Unfortunately, it is expensive. And one of those expenses is high council tax. This year Tyler will be contributing £2972.16 to his various local authorities, of which no less than £2178.36 is going to Surrey County Council.

Now, Surrey CC is an entity that knows how to spend money. Last year they got through £1.4bn on so-called Revenue Expenditure, which was nearly £1,300 for every single inhabitant.

But unlike most local authorities, apart from its ringfenced schools grant, Surrey gets very little financial assistance from central government - the inhabitants are deemed too rich. Indeed, under this Labour government the County has received only about one-third as much support per head as the average authority. True, that's a perfectly fair punishment for voting Tory (which is why Labour voting areas should expect heavy retribution over the next decade), but it has made balancing the jolly old books rather tricky.

So some years ago, Surrey CC chiefs decided they needed to cut costs. And to achieve that, they wheeled out a giant mechanised scythe called the Business Delivery Review, or BDR as it was "affectionately" known.

The results were somewhat less than a triumph. In four years, Surrey's "star rating" - awarded by the Audit Commission for service quality and value for money - plunged from four (the top award) to one (the bottom):

Surrey had landed in the bottom 3% of local councils, alongside Haringey (yes, Baby P Haringey), Doncaster (yes, 7 child deaths Doncaster), and Milton Keynes.

How could that possibly have happened? According to the Commission:

"Surrey County Council is not improving adequately. Overall levels of improvement and service provision are variable. Services for vulnerable children and young people do not meet minimum requirements and safeguarding is inadequate."

The impact of this verdict on Surrey CC was huge. The Chief Executive "left". The Leader of the Council was forced to resign. Many of the top managers were exited. Staff morale collapsed. It was a Grade A disaster.

Things got so bad, an emergency Chief Exec was parachuted in by Whitehall. And most unusually, he has just published his findings for all to see (HTP JF).

He reckons he's found an organisation in breakdown. The staff loathe the managers, the managers fear the chief exec, the members hate the officers, and the officers spend their days trying to ignore an Elephant that's somehow crept into the Room. To summarise:

"The difficult position in which the County Council finds itself is fundamentally a failure of leadership, culture and governance in its widest sense...

...the Council is seen as remote... is viewed as superior and arrogant... problems compounded by a significant breakdown in mutual trust and confidence within the Council... widely viewed as lacking vision, direction and strategy and instead operates by a series of often disconnected short-term tactics... driven by events rather than a sense of the Council being in control of its own destiny... very internally focussed, obsessed with itself, with its own processes and bureaucracy... silo mentality... central control-freakery... blame culture and bullying...

The most striking aspect of the management style is how bureaucratic it has become as a result of an obsession with the control of inputs and resources since BDR which is then mistaken for a focus on efficiency. This is perhaps inevitable given the lackof a clear vision and strategy which means there are no clear strategic outcomes to focus on. Documents... are widely viewed as being designed to keep either the Government or various Inspectors happy."


Absolutely, terminally, hopeless!

We clearly need to get out. We need to move right now to a better council - to... I dunno... Barking and Dagenham - according to the Audit Commision, they are a four star council.


Hmm and double hmm.

The thing is, all local councils are bureaucratic. We surely all know that. And they can all appear arrogant and remote. And they all seem to lack vision and direction. That's just the way it is when they're accountable to the commissars in Whitehall rather than to their local taxpayers.

In fact, because it gets so little funding from Whitehall, Surrey CC is probably rather more accountable to its council taxpayers than many other councils.

And how come the Audit Commission rated Surrey as a three star council last year but only one star this? What changed so quickly? Are we saying last year's assessment was wrong? In which case, why should this year's be any righter?

What changed of course was the Baby P case, and the panic knee-jerk reaction in Whitehall. Once Baby P had died... no, once the public reaction to Baby P's awful death had impacted on our national politicos, then the hunt was on for any council that wasn't ticking all the child protection boxes precisely as specified. And Surrey fell into that category.

We've said it before, but let's say it again: these Audit Commission reports aren't worth the paper they're printed on. Just remember that Haringey Council itself was rate three-star even as Baby P was dying.

We're no particular fan of Surrey CC. But the truth is that most residents think it does a perfectly steady middle-of-the-road type job. School results are above the national average, social services seem no worse than elsewhere, and the potholes in the road aren't noticeably bad.

Sure, Council Tax is ridiculously high, but we know that's largely down to our Labour government. Nobody gets too excited about the Council itself one way or the other (although from the remoteness perspective, it might be nice if it moved County Hall into the county, rather than sitting in the London Borough of Kingston).

But the Audit Commission's report is nothing to do with what we think. After all, we're only the Council Tax payers.

What it really comes down to is that, although the average Surrey resident gets a reasonable - if expensive - service from the County Council, the Commissars reckon "vulnerable children" may not. And since "vulnerable children" are this year's hot button, the Commissars are giving that priority over everything else - including value for money (where they actually think Surrey does quite well).

Like we've said from the start, local democracy and localism will never work as long as the Commissars hold the purse strings.

PS The Audit Commission costs us £210m pa and has c2000 employees. It should be drastically downsized. We should strip it of all the "quality improvement" functions it picked up under Labour, and return it back to its original (and cheaper) simple audit functions. Another contribution to George's list.

Saturday, July 18, 2009

Cutting The Burden Of Welfare

Some of the hardest cuts George will have to make will be in welfare.

The current social security bill is running at £165bn, with another £22bn going on Brown's complex array of tax credits. Added together, they will absorb 13% of our GDP this year - and that's on the optimistic Budget forecasts.

Worse, as the slump unfolds, the burden is going to get even heavier. And we simply can't afford it.

When cradle-to-grave welfare was introduced back in the New Jerusalem, benefits spending was about 4% of GDP. But since the 40s, successive governments of both colours have managed to increase the burden threefold - and contrary to popular belief, it even increased under Thatcher (albeit by just 0.2% of GDP).

Still, in 1997, Labour inherited a booming economy in which the burden was falling quite fast. It had already declined by 1.4% of GDP in the previous four years, and in the next two it went down by a further 0.4%, reaching a low of 10.8% of GDP in 1999-2000.

But as we know, instead of consolidating this promising fiscal position, Brown turned on the spending taps - including significant increases in a wide range of benefits.

For nearly a decade, he got away with it. A booming economy meant that the welfare burden remained only just above where it had been at the end of the 90s.

Unfortunately, reality finally intruded, and with a collapsing economy, Brown's earlier largesse means the burden will soon surpass the peak reached in the early 90s recession.

Of course, behind the scary long-term upward spending trend lies another scary upward trend: our longevity. We're all living too long. Much too long, and fully half our welfare spending goes on pensioners (£87bn this year).

So what's to be done?

One possibility is to shoot everyone over 70. But 59-year old Tyler is not entirely convinced by that option.

More realistically, we need to push up the state pension age to 70, and do it on a much faster timescale than the current leisurely move towards 68 by 2046.

But that will take time. Time the markets might not allow us.

No, George is going to have to wield the knife quickly and decisively, for immediate results.

Child Benefit (£12bn pa) is almost certainly for the chop (as proposed by Reform among others - see here), and many benefits could get frozen.

None of it will be easy. The screams will be loud, and the pain horribly real.

But one thing's for sure - given the size of the burden, welfare will have to take its share.

Inaction is not an option.

Friday, July 17, 2009

Still Heading For The Cliff Edge

This ain't no way to run a government

Yesterday the IMF published its annual Staff Report on the UK economy. It is an alarming read.

First, they are far gloomier than Darling about the depth and length of the slump. They say that GDP will contract by 4.2% this year, and will not recover its previous peak for more than four years. That's far worse than those Tory recessions Brown always used to go on about, and is the worst performance we've seen for 80 years:

Second, the IMF says that the disastrous state of our public finances makes us extremely vulnerable to an even worse outcome:

"The sharp increase in public sector borrowing and contingent government liabilities, together with continued financial sector fragility, are significant vulnerabilities. If there was a renewed and abrupt loss of confidence, possibly triggered from outside the UK, it could spark further financial sector instability, undermine faith in fiscal sustainability and unhinge inflation expectations, thus disrupting domestic and external stability...

...Should fiscal sustainability come into question, interest rates would rise despite monetary easing efforts, the ability of the government to provide support to the financial sector would be severely limited, and pressures on the currency could emerge."

That is what's known as a red flag. When the careful diplomatic wordsmiths at the IMF start talking about undermining faith in sustainability, and unhinging inflation expectations, it means we've run out of road. We don't have time to muck around hoping that isn't a cliff edge just ahead. We have to slam on the brakes now.

So just how bad is it?

Under current spending and tax plans, the IMF forecasts that public sector debt (gross) will reach 100% of GDP by 2014-15. And even in 2015-16, the government's so-called "primary deficit" (ie its deficit on day-to-day spending, excluding capital investment and interest payments) is still 1.4% of GDP.

That's almost certainly not good enough to retain the confidence of the markets, especially given the huge annual borrowing we will be doing:
"Gross financing needs in the near term are high—they are expected to reach 18 percent of GDP in 2010/11, driven by the high overall deficit, amortization, and an increased share of short term debt."
18% of our GDP is a lorra lorra of borrowing - about £250bn (or one-quarter of a trillion, or ten grand for every household). All in one year. And all to be followed by more or less the same again... year after year.

And the IMF also notes that their central debt ratio forecast of 100% of GDP could easily be too optimistic. Here are just three of things they reckon could happen:
  • Interest rates on government debt could move higher - they assume a rate of 1.2% pa (in real terms), which is low by historic standards - if rates moved back up to their longterm average, it would increase the debt ratio to 108% of GDP by 2014-15.
  • GDP growth could be even lower - 0.5% pa reduction would lift the debt ratio to 109%
  • Government bank guarantees could get called - the central forecast assumes no losses on the many guarantees the government has issued, but if we lost around a quarter of their value - entirely plausible - the debt ratio would rise to 113% (and that's on just £777bn of specific bank guarantees - not the implicit and very scary 100% guarantee given on all UK bank liabilities)

So to summarise, we are looking to borrow a shedload of cash, yet we are not proposing to bring our finances under control anytime soon. What's more, any more puffs of wind and we're likely to go over the edge.

Now, you're an international bond investor.

Do you like the sound of that?


So what does the IMF recommend?

Regular BOM readers will find its advice has a familiar ring:

"A strong commitment to reverse the sharp deterioration of public finances within a reasonable timeframe is crucial... implementing an ambitious fiscal consolidation plan will be essential. The focus should be on putting public debt on a firmly downward path faster than envisaged in the 2009 Budget...

... evidence from OECD countries shows that although changes in revenue and expenditure contribute to closing the fiscal gap, expenditure restraint brings about longer lasting and larger adjustment episodes, which are more successful in achieving a debt stabilizing fiscal position. Expenditure reduction demonstrates a firmer commitment to feasible and substantial consolidation, and may trigger lower interest rates and boost private demand... fiscal rules have been shown to contribute to successful adjustments..."

Ambitious fiscal consolidation plan - tick.

Focus on expenditure restraint - tick.

Fiscal rules - tick.

So at least we agree on what to do.

The trouble is, that cliff edge is looking awfully close, and this is no time to play chicken run with the markets.

We really do need you to get those brakes on, George.

Like, now!

Thursday, July 16, 2009

Tribute To Gaia

So let's get this straight. On the very day our buckling economy delivers the biggest ever recorded fall in employment, the government imposes its latest tribute to Gaia.

It will work like this: all over our green and pleasant, and right across our silver seas, we will build 7000 giant religious statues known as "wind turbines". They will be a visible sign to Gaia that we miserable sinners repenteth our sins, and bow down before the one true god.

Yea, and the cost shall be without measure. A tythe of £150bn shall be levied on the rich men at the energy companies. And all the people shall contribute each according to his means whatever the sacrifice. And the pharisees shall treat with the envoys of Russianoligarchicus Caesar so that the people may have light. And darkness shall fall across the land.

As religious tributes go, wind turbines take some beating: they are huge and dominate the landscape; they are expensive; and they have no serious purpose other than worship.

As generators of reliable energy, they are next to useless. We blogged the facts here, but in summary:
  • Supply is highly variable - because of wind variability, they operate at a small fraction of theoretical maximum capacity (Denmark's operate at an average 20%)
  • You cannot store electricity (well you can to a very small extent, but it's massively expensive) - so you can't smooth out windpower peaks and troughs
  • You therefore need back-up generation for virtually the entire peak load - either nuclear, Russian gas, or coal

Of course, if you rely on the BBC and C4 News for your facts, you won't know any of this. Last night's reports identified the main problem with the government's tribute as being that it doesn't go far enough. Gaia is seriously pissed, and we need to speed ourselves into the darkness even faster.

So how is this all going to play out?

Here on BOM, we are great believers in the ultimate wisdom of crowds. As the costs of these massive tributes become more visible, cash-strapped voters will make it perfectly clear they don't want it. Even Millipede Jnr can see "there's a job of political persuasion to be done".

There sure is Ed. The problem for him - and the BBC (see here for the outrageous BBC position) - is that although they keep talking about "the science", they've never actually convinced us of its validity.

More and more of us are coming to understand that this so-called "science" comprises little more than a set of flimsy computer models cranked up to produce 50 year weather forecasts - ie the forecasting error of the Met Office's five-day forecast multiplied by 3,650 (and I have a funny feeling stats theory says it's humongously more than that).

Religions depends on faith. Fair enough.

But when it comes to keeping our homes heated and our economy on the road, I'd prefer to rely on what we actually know. Most of us have no wish to render our futures unto Gaia.

PS Talking of BBC scare-mongering, on Tuesday night Newsnight told us that by next month 50 people a day will be dying from swine flu. They calculated that by multiplying Andy Burnham's "100,000 new cases a day by August" by Imperial College's estimate that 1-in-200 infected people will die. Wha!? we thought - that's a pretty worrying thought on which to head off to bed. So yesterday I took a quick look at the stats. So far, there have been some 90,000 reported cases worldwide, and just over 400 deaths - so about a 0.5% death rate. But of course, that's only among reported cases, and many people apparently don't report - indeed, many don't even realise they've got it. So given a vast range of reporting standards worldwide, how do we know the worldwide stats are any guide to our own death rate? Answer - we don't. So far in the UK (up to 8 July), there have been 9,718 reported cases in the UK; to date there have been 17 deaths - a death rate of 0.17%. Unless I missed it, Newsnight's Susan Watts didn't mention that.

Tuesday, July 14, 2009

M25 Debacle

For some reason the Department for Transport's offical vid forgot to ask him about the outrageous costs

A few days ago, one of BOM's old friends was out and about in leafy Buckinghamshire. Sadiq Kahn has moved up since he ate that poor IT guy who dared to suggest the NHS Supercomputer wasn't going to work . These days he's the Transport Minister, and he'd come to mark the start of the M25 widening project. Standing in front of the DfT's corporate banner, he said:

"Today marks a major step forward in our commitment to building Britain's future and increasing capacity on the busiest sections of motorways and trunk roads. Everyone who uses these important stretches of motorway, whether business or leisure travellers, will benefit from the massive investment."

Commitment to the future... massive investment... if you think that sounds like another huge bill for taxpayers, you'd be right.

Now let's all agree we need good transport infrastructure. And let's all agree our major roads would be much better shape to handle today's congestion had this clothead government not put a hippy moratorium on new projects during its first term (see this blog).

Let's simply focus on the monstrous cost of the current widening scheme, and how it has escalated since first approved.

The M25 project is a PFI deal comprising two elements. First, the widening of some of the motorway, and second the running and maintenance of the entire M25 network over the next 30 years.

The project was first approved by ministers in April 2004. At that stage, the capital works to widen 63 miles of motorway were estimated to cost £1.6bn, and the 30 year maintenance concession would cost £3bn (£100m pa). Giving a total of around £4.5bn (which was the figure quoted by ministers).

Two years later, in 2006, a shortlist of 3 bidders was announced. And in 2008 the winner was announced - Connect Plus, a consortium made up of Balfour Beatty, Skanska, Atkins and Egis Projects (er, yes... the same BB and Atkins who were also involved in the Metronet disaster).

At that stage, the cost was still put at £4.5bn, and an early deal close was eagerly anticipated - not least because it was hoped to get much of the work out of the way in time for the 2012 Olympics.

But the months ticked by, and the close was postponed. And the quoted cost figure stealthily crept up to £5bn. It seemed the project had encountered some late snag.

Then last autumn the banking crisis struck, and the entire PFI market was thrown into turmoil. That's because - as we've blogged before - PFI deals depend crucially on bank finance, and if the banks won't lend, there's no deal.

Well, there's no deal unless the government is prepared to juice up the terms so much that even cash strapped bankers can't resist.

And in the case of the M25 widening, that's precisely what happened.

Because when the deal finally closed in May this year, the cost had escalated yet again - from £5bn to £6.2bn - a 38% increase over the originally quoted £4.5bn budget.

And that wasn't all.

Whereas the original scheme had called for the widening of 63 miles of motorway, under the final deal only 35 miles are to be widened - a 45% reduction.

So once again, taxpayers are left paying hugely more and getting hugely less.

Of course, the government does have an explanation. According to the Highways Agency:

"This [cost increase] was because margins paid to the banks have increased as a result of the current economic climate."

That is, because of the international financial crisis - which as you know, was nothing to do with this government - the commercial banks have racked up their interest charges - the margin they charge on top of market interest rates. So the costs of this deal have naturally escalated.

What a load of piffle.

HTF can higher interest charges possibly explain a cost escalation from £5bn to £6.2bn (let alone the escalation from the original £4.5bn, or the 45% reduction in road widening)?

Let's do the math.

The consortium is raising £925m of commercial bank debt. But the overall cost to us has escalated by a minimum of £1.2bn. So if that increase is entirely accounted for by higher interest charges, it means that such charges are an average £40m pa higher than previously planned. Which implies that the average interest rate charged has gone up by at least 4.3% pa (40/925). And in reality it would have to be much more, because most of that debt will be paid off long before the end of 30 years.

But how can interest rates have gone up that much? Market interest rates (including LIBOR) have come down - not gone up. And although the margins banks add on to those market rates for their loans have increased, the increase is of the order of two percentage points - not 4-5%.

So what's really going on?

Yup, you guessed it - once again, we taxpayers are being screwed to the floor courtesy of the Simple Shopper.

Ministers were so desperate to push the project through, because of all those jobs and grandstanding opportunities (see vid), they were prepared to pay any price. In fact they were so desperate, work started within hours of the final deal being signed.

The consortium, not unnaturally, took full advantage.

And before you squawk about grasping capitalists, let's remember they are only earning a perfectly legal crust. They can't be held responsible for the idiocies of government. We don't blame them one little bit.

No, next time you're fuming in an M25 superjam, grinding your teeth at the higher fuel duties you've been forced to pay to clear the nation's debts, just make sure you remember where the real blame lies.

PS As we've blogged before, we've changed our mind about PFI. In principle, it ought to give taxpayers a good deal, but in practice - in the hands of the Simple Shopper - it's a recipe for rip-off, especially with one-off megaprojects like the M25.

Monday, July 13, 2009

Shame And Anger

More demands - less resources*

Not for the first time, Tyler is feeling ashamed and angry.

How can these politicos - the ones we're responsible for because we elected them - have committed our troops to a war with such half-baked and unachievable objectives? Surely they can't really believe we can establish democracy and the rule of law in Afghanistan?

And why have they sent the troops in with such hopelessly inadequate force and equipment? Who do they think they are to put lives on the line in such a contemptible manner?

Of course, the Defence Secretary says the head of the Army is plain wrong. Apparently, there are plenty of men and helicopters. And it is perfectly true that Generals always want more resources.

But who are we going to believe - General Sir Richard Dannatt, a career soldier with nearly 40 years distinguished service to the nation; or Bob Ainsworth, an ex-trade union official from the Red Robbo 70s car industry and a former candidate member of the International Marxist Group?

Quite apart from the fact that Ainsworth looks and sounds like a jobsworth district council official in charge of dockets, his entire experience of defence comprises just 24 months behind a Whitehall desk (apart, that is, from his time with IMG, when they were supporting the IRA in its "armed struggle" against the very army he's now responsible for).

And let's just remind ourselves of the background here.

Even though it has made our troops fight two simultaneous wars, this government's commitment to defence has been dismal. In the last five years there have been no fewer than five defence secretaries, an average of one a year. And not one of them has been what you'd describe as a star.

On the money front, their performance has been even more shameful. Despite an endless series of dangerous foreign ventures since 1997, and despite the fact that they increased every other major department's budget as a share of GDP, they actually reduced MoD's share.

In 1997, defence spending was 3.1% of GDP . Last year, it was 2.7%, which represents the lowest level of defence spending since Ramsay MacDonald's disastrous pacifist policy during the thirties (average spending of 2.7% from 1929 to 1934).

But in MacDonald's case, at least low spending was consistent with his pacifist policies. This lot have held down resources while at the same time being quite happy to strut about on the world stage committing our boys here there and everywhere.

Cameron has to do better than this. It is wholly unacceptable to have our troops thrown into major wars without sufficient numbers and kit.

*Footnote - The chart above is lifted from the excellent Far superior to HM Treasury's own site, it lets you look at all the main categories of public spending both in money terms and as a percentage of GDP. Plus, it has data going back to the Nineteenth Century. Here's defence:

So we can see the two peaks for WW1 and WW2, the latter being far more costly in GDP terms (even if much less costly in terms of British service lives). We can also see the smaller peaks for the Boer War and Korea. But perhaps the most striking thing is the low burden prior to 1900 - after all, weren't we running half the world at that point? Answer - yes, we were. But the Pax Britannica must have been so powerful, we didn't actually need to spend all that much to keep it in place. Although we might just note that for the Second Afghan War (1878-80), we did need to send 40,000 troops, as opposed to the mere 8,000 we have there now. We reportedly won the war, but lost 1630 men, and got out as quickly as possible.

The Battle of Kandahar 1880