Thursday, April 30, 2009

Nearly Men On The Job


When you think Labour Chancellors, you naturally think uncontrolled spending, wild borrowing, and crippling debts. Gordo and his poodle fit the bill precisely.

But there have been one or two Labour Chancellors who attempted to break the mould, and deliver at least approximate fiscal sanity. Two that spring to mind are my Lord Jenkins of Hillhead and Baron Healey of Riddlesden.

So during a brief stay in hospital this week ("routine investigation" - make your eyes water - don't ask), Tyler read Giles Radice's Friends and Rivals, his account of long-time Labour "nearly men", Jenkins, Healey and Crosland (the "golden generation" who "so nearly" scrabbled to the top of the greasy pole - see here for hilariously bitter book review by Gerald Kaufman).

In today's circs, the experiences of Jenkins and Healey are very interesting. Both had to confront public spending that had grown too fast, and was far higher than the economy could bear. Both were driven by fear of a collapse in market confidence, and a catastrophic run on the pound. And both had to face down passionate opposition from their own "colleagues".

In Jenkins' case, he became Chancellor in 1967, after Wislon had finally been forced to devalue. His task was to tighten fiscal policy and get a grip on rampant public spending, which had increased by a bonkers 25% in real terms over the three years since Labour had taken power.

Jenkins grabbed headlines with Iron Chancellor style spending cuts (along with some other deflationary measures). But when you examine the figures, you find all he actually achieved was a public spending standstill - spending in real terms remained unchanged between 1967-8 and 1970-71. Not what Tyler would call a real Iron Chancellor.

Healey did better. He became Chancellor in 1974, again after a period of mad public spending growth - this time under Big Government Heath. Real terms spending had increased by 27% in just four years.

And although he faffed about for his first two years (mainly spent playing to the gallery with promises to squeeze the rich until their gilded balls squeaked), after sterling nearly died in 1976, Healey subjected public spending to a SERIOUS haircut. In one year, he cut spending by 4% in real terms - the biggest decline we have ever seen (ex post-war defence rundowns).

But it wasn't easy. Not only did he have to face down Wedgie Benn and the Labour Conference, not only did he have to threaten Prime Minister Callaghan with resignation, he also had to call in the IMF to prove to the cabinet that there really was no alternative.




We must cut spending, I tell you

So what are the lessons for today?

First, real terms spending increased by an astonishing 40% in the first eight years of this decade - even more than in the eight years prior to the crisis of 1976. And on top of that, we've got the bank bailouts - our current problems make the 60s and 70s look like a breeze.

Second, A Darling is no Healey - he's not even a Jenkins.

Third, when George takes the controls he'll have to be tuff tuff TUFF. Yes, it's a Tory government, not Labour. And yes, he can count on Cam's support (can't he?). But his spending "colleagues" will all have their own corners to fight, and they'll shaft him without a second thought.

And while Healey's 4% real cut is the all-time record, George is going to have to find something closer to 10%.

It's a huge task.

So let's hope that when the book is written in thirty years time, George will come out as the strongman who saved Britain.

What we do not need is yet another nearly man.

PS So will Brown go down as the worst PM since WW2? Wislon won four elections and... er... kept us out of Nam. Eden called and won an election. Douglas-Home very nearly turned things around during his very brief tenure. And Major now looks like a genius. Unelected, unloved Brown is simply leaving a trail of disaster. And we've still got another year to go...

Tuesday, April 28, 2009

Cam, Cuts, And Culture



How it was the last time around

We've been reading Cam's speech on the new Age of Austerity. And we like the sound of it a whole lot more than most of his previous offerings.

Forget sharing the proceeds. He now tells us:

"The money has run out."
Damned straight. And there's more:

"... some people say: let’s get through the recession, let’s get through the election we can keep on spending more, keep on borrowing more, and deal with the debt crisis later.

Wrong - seriously wrong.

The alternative to dealing with the debt crisis now is mounting debt, higher interest rates and a weaker economy.

Unless we deal with this debt crisis, we risk becoming once again the sick man of Europe. Our recovery will be held back, and our children will be weighed down, by a millstone of debt."

This could be Tyler talking.

"Everybody knows that Labour’s Debt Crisis means public spending cuts."

Spot on.

But what? How about a few of BOM's old favourites?

  • "scrap the ID cards scheme" - we say Yes, along with all those other grandiose and unworkable government supercomputer projects (see many previous posts eg here);
  • "get rid of Regional Assemblies and all that useless regional bureaucracy" - we say Yes, and have blogged it many times (eg see here);
  • "government spends nearly £400 million a year on advertising"... slash it - we say Yes (eg see this post)
  • replace the NHS supercomputer with "Google Health or Microsoft Health Vault" - we say Yes (see this post)

So yes to all of that.

But as we've said before, it won't be nearly enough. We all need to dig much deeper into the spending mountain.

Which is where another of BOM's long-standing enthusiasms comes in - a Transparency and Accountability Act, modelled on the new US system, and giving public spending a good dose of sunlight disinfectant (eg see this post). Cam now says:

"I can announce our ‘People’s Right to Know’ plan – a democratic check on wasteful spending. Every item of government spending over £25,000, nationally and locally, will have to be published online.

...it can have an especially powerful effect when it comes to salaries. Spending on public sector salaries has soared under Labour... [especially] the wage bill for the swarm of unaccountable quangos that has infested our country.

People have a right to know exactly how much they’re getting. So we’ll publish online all public sector salaries over £150,000. Let’s see which officials have been getting rich at the taxpayer’s expense - and whether they’re worth the money."

Information being power, we say hurrah!

But Cam wants something beyond cuts and taxpayer scrutiny: he wants nothing less than a change of culture in government:

"We need a massive culture change at every level of government, to make the state careful, not casual, with public money...

It’s not government money, as Labour like to say.

It’s your money."

Hallelujah!

Just one small thing - how do we change an entire culture?

Because we've had quite a few attempts to change government culture, and they've never been what you'd describe as a rip-roaring success.

Cam says he'll require all government departments to have a professionally qualified Finance Director who will focus relentlessly on matters money. But since that's supposedly a requirement already (eg see this post), you shouldn't hold your breath for any discernable effect.

He also says he'll "impose a new fiduciary responsibility on senior civil servants – a contractual obligation to save the taxpayer money". But as the Gershon "efficiency programme" illustrated all too well, the question then becomes what's a saving? Will Cam be happy if they cut spending but a thousand pensioners freeze to death?

And then there are his backsliding cabinet "colleagues":

"With a Conservative government, if ministers want to impress the boss, they’ll have to make their budgets smaller, not bigger.

On my watch it will be simple: if you do more for less you get promoted if you do less for more, you get sacked."

Riiiiight.

Cam is far too young to remember how this worked in Thatcher's first cabinet. It too had a mission to cut spending, and one of its strongest advocates was Sir Keith Joseph - the Mad Monk. But Joseph was Secretary of State for Industry, and as Britain tipped into the early 80s recession (much less severe than now), he appalled himself by being forced to ask Thatcher for more money to support the many lame duck industries under his departmental wing.

Government spending departments are not called spending departments for nothing. Spending money is their culture and nothing will change it.

The only way you can hope to grip it, is to do what Thatcher/Howe did.

You have to impose tough top-down cash limits, driven by affordability not departmental pleading.

You have to close your ears to the screams of spending "colleagues".

And you have to be prepared for a life of evil - because that's the way you will be portrayed for ever after by the BBC and the rest of the lib media.

PS There is of course one thing that Cam could do to really change public sector culture. He could follow through on all those promises of decentralisation by breaking up the big spending blocks. And just to remind him, that means school vouchers, social health insurance, fiscal decentralisation, and more directly elected officials (eg the sheriffs). Choice and competition are the only way to drive real culture change.

Monday, April 27, 2009

Does Government Debt Interest Matter?


He's dumb alright, but nothing to do with our real concerns

According to Roger Bootle, people like Tyler worry far too much about the government's mounting debt interest bill:


"This is another example of how dangerous it can be to compare the position of a whole economy with that of an individual. If any of us had equivalently huge debts, we'd be bust, plain and simple.

But this does not apply to the economy as a whole because we owe the Government's debts to ourselves. The common approach to this issue is to imagine that the huge interest payments from the Government will be poured into a black hole. In fact, though, they will be received by all those who hold the extra gilts, namely pension funds, insurance companies and banks, aka all of us at one remove."

Hmm.

If that's right, why worry about government borrowing at all?

If we just owe the money to ourselves, and if we are just paying the interest to ourselves, the government could make us all richer by borrowing to give everyone a handout. It could give us, say, a grand apiece, covering the initial cost by borrowing £60bn, and covering the debt interest by borrowing a bit more on top. According to Mr B, the borrowing and interest wouldn't make us poorer, and we'd all be up a grand on the whole deal.

Excellent. Although why stop at a grand?

If only the real world was like that.

The reality is that nobody except the Straw Man thinks the government's debt interest payments are disappearing into a black hole. We all understand they go to investors (including widows and orphans). But that doesn't stop us worrying about their rapid escalation, and the huge strain they will soon be putting on the public finances.

As we've noted before (eg see this post), the fall in debt interest costs during Labour's first term was absolutely crucial to them. In the five years to 2002, debt interest payments as a proportion of government revenues fell by 4 percentage points. In today's money it was a free gift of around £20bn pa (or 5-6 pence on the standard rate of income tax). And it provided the fiscal firepower to boost spending on schools and hospitals without apparently undermining the budget.

Unfortunately, the wheel has now turned. What was a virtuous circle in the late 90s has now turned decidedly vicious. Increased borrowing means increased interest payments means increased borrowing means... etc etc. And increased borrowing almost certainly means increased gilt yields, as investors demand more protection from future inflation risk (eg see this post).

The Budget forecast a 40% rise in debt interest payments, from £31.5bn last year to £43.8bn next. It didn't give explicit projections thereafter, but based on the debt projection, we can derive our own.

The following chart gives three alternatives, reflecting three alternative outlooks for gilt yields. The low version assumes an average yield of 4.5% - roughly what the Budget assumed, and roughly the level of long-term gilt yields today. The alternatives both envisage higher yields - either 5.5% or 6.5% - reflecting the extreme likelihood of higher inflation, along with a reversal of the Bank of England's recent massive gilt purchases (so-called Quantitative Easing, aka printing money).




As we can see, the outlook is grim under any of the three alternatives, with annual debt interest rapidly heading for £100bn pa under the worst.

Except of course, gilt yields of 6.5% pa is by no means the worst possible scenario. As we've mentioned before, in the dark days of the 70s, gilt yields peaked at over 17%.

Bottom line?

Government debt interest matters a lot. We are rapidly heading back to a situation where interest payments are consuming 12-13% of government revenues, compared to the mere 5-6% we got used to in recent years.

It will be a crippling and long-lasting legacy from Labour's latest debt binge.

And it will hugely increase the temptation for a future government to inflate the problem away.


PS Not quite sure what's happened to Mr Bootle. I'm sure he used to be quite sound, but these days he's gone all 50s Keynesian on us. He keeps telling us to relax about government megadebt and printing press hyperdrive, because the alternatives are all worse. And anyway, our rulers will somehow get things back on track before the inflationary conflagration. Wonder where he stands on fairies behind the potting shed?

Sunday, April 26, 2009

Repaying The National Debt. Not.


These days you don't even get a nice certificate to keep

A question we've been hearing a lot over the last few days is HTF is HMG ever going to repay all this debt it's taking on?

The short answer is that it's not going to.

Consider the history of HMG debt.

On today's definitions, we've only got fully consistent stats going back to 1974-75. And this is how they look, including the latest hairy Budget projections up to 2013-14:


As we can see, it's basically four decades of increase.

The only exceptions were two short periods in the late 80s and late 90s. Between 1986-87 and 1990-91, we managed to repay £16.5bn, constituting about 10% of the National Debt. And between 1997-98 and 2000-01, we repaid £40.9bn, around 12%.

But both of those periods saw exceptionally strong economic growth combined with falling interest rates. Moreover, in the overall scheme of things, neither actually made much of a dent in what we owed.

So HMG's record of debt repayment in the recent past is pretty weak.

But to get a fix on today's problem we really need to look back further - to the period after WW2 when we were struggling with the massive debts we'd accumulated in two world wars.

By 1946, our national debt was an humongous 250% of GDP - even worse than the 100% we're facing now. Yet, although it took us three decades, by 1974 we'd got it down to a manageable 50% of GDP. So how did we do that?

For this period we have to use the traditional definition of the National Debt, which comprised the liabilities of the National Loans Fund (don't ask, but there's not a show-stopping difference from today's definitions, and if you're really interested, read this). Here's how it looks for the three decades from 1945 to 1974:


Well, what do you know? Although over these three decades we reduced our debt burden from 250% of income to 50%, we actually made no net repayment at all. In fact, we doubled our outstanding debt.

The trick?

Oh, you guessed.

Over those three decades, money GDP increased nearly sevenfold, so as a percentage of GDP, debt fell sharply.

But here's the scary bit - of that sevenfold increase in money GDP, the vast bulk comprised inflation. In fact, over the period as a whole, inflation eroded the real value of government debt by nearly three-quarters.

Or as we creditors say, HMG defaulted on three-quarters of what it owed to the poor schmucks who'd been stupid enough to lend.

In ten years time, please don't say you weren't warned.

PS Oh, go on then. Just for fun, here's HMT's long series for the National Debt (old definition) as a percentage of GDP (1858 - 2004):

As we've said before, debtwise, those World Wars were a serious mistake. Although perhaps not so much of a mistake as Gordon B.

Saturday, April 25, 2009

Operation Doomsday


Yesterday, the Major was returning from a Regimental luncheon on the 16.45 to Portsmouth Harbour. Keen not to nod off and overshoot Guildford again, he looked around for a discarded copy of the Sun to read. But slotted down the side of his seat he found one of those Top Secret documents government ministers and officials leave lying around on public transport.

Entitled "Operation Doomsday", it seems to be a briefing from General Secretary Brown to the inner Commissariat:

"Comrades!

As agreed, we have intitiated Operation Doomsday (OD) - the final destruction of the Evil Tories. When they win the forthcoming election, they will inherit the toxic legacy to end all toxic legacies. They will open the books and discover we are literally bankrupt.

By the middle of the next decade, government debt is set to exceed 100% of GDP, the universally accepted definition of a banana republic, and a level guaranteed to ensure a panic flight from sterling and a collapse in the financial markets.

But we have laid a cunning trap. Our budget projections have disguised the true extent of future borrowing by the use of wholly unrealistic assumptions for growth, hidden and unachievable public spending cuts, artificially low debt servicing costs, and no allowance whatsoever for the cost of bank bailouts. The true outlook is massively worse than anyone suspects.

In June 2010 the hated aristocrat Cameron will face an insoluble problem.

If he increases taxes, he will snuff out any vague chance of economic recovery, drive many of his voters abroad, and finally destroy all credibility with his plutocrat backers.

If he cuts spending, it will quite rightly be seen as a direct attack on babies, silver-haired grannies, and hard-working families.

But if he does nothing, international investors will stop buying gilts, sterling will collapse, and he'll have to crawl on his belly to the IMF. Which, I may remind you, is an organisation currently headed by a French Socialist, but soon to be headed by myself.

He will have only one real option - inflation. He will have to inflate the debt away, just as we did over the three decades following the second world war.

But inflation will impoverish the rentier class. Cameron will undermine a vast swathe of his own electoral support. The hated Tories will splinter and disintegrate as a serious political force.

In 2015 we will sweep back to power. We will establish a socialist hegemony that will last for a thousand years!

Comrades, we are engaged in an historic class struggle. Final victory beckons. We are on the brink."

****

Gordo's got some neck, though.

Yesterday he was out and about claiming that the Tories would slash public spending and sack thousands of hard-working nurses and teachers. He said:

“Our New Labour government, we are taking the right decisions for the long term and the short term. What would the Conservative Party choose to do? They would do nothing but cut, cut and cut again the services on which we depend. They would be cutting services this month, next month and every month thereafter. And even in the most difficult years for people, they would be cutting the services before breakfast, before lunch and before dinner. The Conservatives have a duty to tell us how many teachers, how many nurses, how many doctors would lose their jobs.”

He entirely overlooks the fact that his own budget incorporates massive public spending cuts with virtually no detail on what will be cut.

According to the excellent IFS analysis, taking the Pre-Budget Report and the Budget together, Brown is planning for a fiscal tightening by 2017-18 in excess of 6% of GDP (around £100bn pa in current money). But hardly any of it is specified - the announced tax rises account for well under 1% of GDP, and the rest is unidentified:


Brown clearly believes he's manoeuvred the hated Tories back onto his chosen battlefield of public service cuts.

Maybe he really has gone potty.

Thursday, April 23, 2009

Why Do You Always Forget?


This used to be an economy
I've just watched Ali D on the telly. He looks finished, and even Nick Robinson is turning on him.
You wouldn't put the mangiest, most flea-bitten mutt imaginable though this.
Darling knows he's effed. He knows the entire country's effed. And he knows we know that he and his chums are responsible. He knows history will judge him the second worst Chancellor ever - only El Gordo is worse.
Poor Ali -why do we have to torture him like this?
I blame you.
I blame you because if you hadn't voted them in, none of this unpleasantness would have happened. Our economy would still be fine, and poor Ali would still be a happy opposition spokesman - not a care in the world.
Why did you do it?
Why do you guys ever vote them in?
Surely you should have learned by now.

EVERY SINGLE LABOUR GOVERNMENT WE HAVE EVER HAD HAS LEFT OUR ECONOMY IN RUINS:
  • MacDonald - ruins

  • Attlee - ruins

  • Wislon -ruins

  • Callaghan - ruins

  • Bliar/Broon - ruins

See?

See the pattern?

Now WTF can't you just remember it?

Is that so much to ask?

Strategic Void


Into the unknown


Yesterday's budget was way beyond depressing - it was downright alarming.

It wasn't just the dire state of the public finances, with government debt still forecast to double in next five years, despite preposterously Panglossian growth assumptions, and despite ignoring the costs of the bank bailouts.

Even more alarming was the complete absence of any coherent strategy for gripping the crisis. Just like so many Labour budgets before, it's an unconvincing mix of fudge, half-truths, and wishful thinking.

Look, I know we've droned on about fiscal strategy many times, but it is now absolutely critical that we have one.

Why?

Because otherwise, sooner or later, the markets are going to lose confidence in the government's financial probity. And the costs of that will make our current predicament look like a Sunday afternoon picnic.

Remember the 70s, when the markets last lost confidence. The government found great difficulty issuing its bonds, because investors went on strike. They demanded much higher returns, and gilt yields (roughly, the interest rate on government bonds) reached an eye-watering 17%. To re-establish credibility, the Callaghan government eventually had to go crawling to the IMF.

Right now, the average interest rate on government debt is just over 4%. So with outstanding debt of £620bn, the cost of annual debt interest is £28bn.

But supposing the interest rate doubled to 8-9% - still much lower than the 70s. Then, with debt itself set to double, the annual cost of debt interest would go up fourfold, to well over £100bn pa. And to pay the extra, taxes would have to rise massively - equivalent to say, a doubling of VAT*.

So it is essential to maintain market confidence.

Now, nobody would start from here, and none of the options look good. But what we need is a fiscal strategy addressing two main issues - affordability and value for money.

On affordability, we need to acknowledge that much of the collapse in UK tax revenues is permanent, reflecting the collapse of our financial bubble - it's gone. And that means we can no longer afford the same level of public spending. Spending has to be cut, and our strategy has to set explicit targets for doing so. No more fudging - we need that Third Fiscal Rule spelling out limits for spending as a percentage of GDP (see many previous posts eg here).

On value for money, everyone now agrees that the public sector is riddled with waste - the TaxPayers' Alliance estimates it's costing around £100bn pa. But simply telling spending departments they've got to be more efficient just doesn't cut it. We've had government efficiency programmes as long as I can remember - Heath's government certainly had them - and none of them have really got on top of the problem.

The real key to more efficiency in the public sector is choice and competition - just like it is in the private sector. And instead of nibbling round the edges, we need an explicit overarching strategy to spread choice and competition across the public services. We've blogged many of the ideas before - school vouchers, social health insurance, fiscal decentralisation, directly elected officials, etc. It would be much clearer and easier to implement if we connected up the pieces into a stated strategy.

If we had both of these strategies in place, it would not only comfort the financial markets that HMG was committed to living within its means, it would also comfort taxpayers that that HMG was actually serious about delivering value for all that money.

*Footnote Yes, OK, the full impact of higher gilt yields would take some time to move through into debt interest costs, because existing gilts have lower yields fixed for years to come. But trust me, within just five years the pain would be more intense than you'd want to bear.

Wednesday, April 22, 2009

Clueless In Cuckooland


I'm freeeee!!!!

Mister Speaker, the budget I am presenting today sets the seal on 12 years of unparalleled success for Cuckooland.

Public borrowing has set new records. We have never before borrowed 12.4% of our GDP in peacetime.

Public spending has only ever exceeded 48% of GDP once before - back during the glorious Labour government of the 1970s.

As for taxes, my new 50% tax rate is merely the first step. I am confident that in the next year or two we will be in a position to raise it further. Our long-term goal being to re-establish the 95% rate Cuckooland enjoyed before the Evil Thatch appeared.

Now, I know that the moaning minnie doubters will tell you I am being too optimistic.

They will say that Cuckooland will not achieve the 3.25% pa growth rate I am forecasting, and that my higher taxes will cause a mass exodus of entrepreneurs and brainpower.

They will say my public spending efficiency savings are pie in the sky.

They will say that I am hugely underestimating the cost of nationalising the banks, and that spiralling debt interest costs will drag Cuckooland beneath the waves.

To which I say, cuckoo.

Cuckoo, cuckoo, cuckoo.

****

What a shambles:

  • Debt explosion - even on Darling's figures, debt on the Maastricht definition is forecast to be 90.7% of GDP by 2013-14 (against a Maastricht limit of 60%) - and ludicrously, that excludes anything for the cost of bank bailouts
  • Wildly optimimistic growth assumptions - no mainstream forecaster is anywhere near Darling's assumption of 1.25% growth next year and 3.25%pa thereafter. Tyler's fag packet says that taking the IMF's latest growth forecasts instead would add about £30bn pa to Darling's borrowing forecast by 2013-14
  • Wildly optimistic bank bailout assumptions - Darling's borrowing forecasts exclude any losses, even though he reckons the cost will be 3.5% of GDP; worse, the real cost will be more like 13% of GDP (£200bn), as forecast by the IMF yesterday
  • Wildly optimistic public spending assumptions - Darling factors in £15bn pa of spending cuts, but they're in the form of Gershon "efficiency savings", the ultimate Marx Bros funny money.
There are two possible explanations for such a load of wishful thinking. Either he actually believes it - quite possible given the record - or, more likely, they realise they're stuffed, and want to leave as big a mess for the Tories as they possibly can (like, how will Dave and George defuse that ticking 50% tax rate, given that there's no money?)

Gah!

I've said it before, and I'll say it again - I simply cannot understand why you idiots out there elected these appalling people.

Muzzling The IMF


The censored IMF table (click to enlarge)

Our terminal floundering "government" has shown it's still capable of one thing - attempting to suppress the truth.

They've managed to bludgeon the IMF into the extraordinary act of expunging an embarrassing forecast from a paper already published. The IMF has removed their forecast of the UK's bank bailout costs from their weighty Global Financial Stability Report issued yesterday.

As we said yesterday, the IMF's forecast is truly shocking. Their economists reckon that UK taxpayers face a bank bailout bill of 13.4% of GDP, or around £200bn. That's higher than any other G7 economy, and only a smidge behind Ireland (see table above).

Of course, in the real world, the Stallion of Truth has already bolted - too many people like Tyler have already downloaded a copy. And while the IMF's top management have had their arms twisted, we now know what the IMF's economists actually think (remembering that the IMF has a long history of only publishing sanitised versions of its forecasts, pre-approved by key member governments, such as ours).

We must confess we haven't read the entire 240 page IMF report, but a quick perusal reveals other awkward comments on Brown's economic stewardship.

For example, they highlight how he presided over the biggest bank credit bubble in the history of modern crashes. They say:

"... the rise in bank credit in the United Kingdom has been massive, and has been greater in the United States and European Union than in Japan in the years preceding its bubble."

And here's their eye-popping chart:

Bear this in mind when Darling starts banging on about... er... "investing for the future".

Tuesday, April 21, 2009

HaystackWatch


The truth is in here somewhere

No time for a proper blog today, but tomorrow, Tyler will be spending Budget Day at the palatial offices* of the TaxPayers' Alliance. We'll be attempting to spot the inconvenient truths lurking in the haystack of numbers Darling will be pitching in our direction. Gordo's already attempted to distract our attention by ordering A Crack-Down at the trough (believe it when you see it).

Tyler will have three basic questions:
  1. Are Darling's borrowing forecasts realistic? As we blogged at the time, his Pre-Budget forecasts made ludicrously rosy assumptions about future GDP growth and prospective losses from bank support operations
  2. Are his measures to cut public spending credible? As we blogged yesterday, more-of-the-same Gershon/Marx Bros efficiency cuts just won't do.
  3. How much is he going to raise taxes? And how will he attempt to disguise it?

On question 1, the IMF says today it expects UK taxpayers to lose about £200bn from bank support operations. That is a huge amount (c£8 grand for every household), and it makes a nonsense of Brown/Darling's previous claims that we'd lose nothing. So how will Darling fund that?

Watch this haystack.

*The TPA's telephone box style offices are now so packed with operatives, Tyler wonders if there'll be room for extra hands. Maybe he'll have to decamp to the pub - before the rise in beer tax is announced.

Monday, April 20, 2009

See-Nothing Slasher Flick


Don't get your hopes up


According to Wiki, "the slasher flick is a sub-genre of horror film, typically involving a psychopathic killer stalking and killing a sequence of victims in a graphically violent manner."

Sounds great, and based on the spin, you must be looking forward to a screening this coming Wednesday."Alistair Darling's Budget to demand £15bn cut in public spending", promises the Times. "Darling '£15bn spending cuts due', agrees the BBC.

Let the slashing commence.

Except...

First, in the context of our fiscal black hole, £15bn isn't nearly enough. It's only just over 2% of public spending, whereas we need to find a cut of more like 10%.

Second, it turns out that the leaked £15bn headline number includes £5bn of cuts already announced last November - it's another classic Gordo double-count.

Third, this entire slashfest will be nothing more than a re-run of the old Marx Bros comedy "Gershon Soup" (see many previous posts gathered here). As you will recall, the National Audit Office found that the bulk of the Gershon "efficiency savings" were in fact bogus. Indeed, some actually increased spending because of their unintended and unforeseen consequences (eg an increase in hospital emergency re-admissions following a move to shorter in-patient stays).

So if you were hoping to see some serious gore on Wednesday, prepare to be disappointed. It will be see-nothing.

Other than a gigantic sea of red ink:



Of course, simply because no slashing is shown on screen, doesn't mean it won't take place out in the real world.

Now that the money's run out, out in the real world, Gershon "efficiency savings" will bite. The days of cosmetic funny money savings being well and truly over, departments ordered to make Gershon savings will somehow have to cut real actual spending.

As Tony Travers puts it:

"This [£15bn] reduction will be achieved by "efficiency savings" across Whitehall. In other words, Alistair Darling is to announce a spending cut with no service cuts, the best possible outcome for any minister.

Magic. At a stroke Darling sounds tough while not requiring any frontline services to reduce their spending...

...Having seen a growth in popularity of "stealth taxes", we are now going to witness politicians attempting to deliver "stealth service cuts".

Sounds about right.

No slashing on the screen, but plenty going on away from the cameras. And well away from those responsible.

Workers' Flats


The Major and I watched Heather Brooke's excellent C4 Dispatches prog last night on MPs' expenses ( the Westminster Gravy Train - watch again at 2.25am (!) on Tuesday).

As the disgusting details of unbridled trough snuffling spewed forth, the Major got so agitated he was forced to open a second bottle of his medicinal Romanian cognac.

"WTFFFFF do we have to pay for all these second and third homes!!?? Why don't we just build a block of workers' flats in Lambeth for them to live in?"

Well, why indeed? That's what they do in Sweden.

"And WTFFFF do we let these people have second and third jobs!!?? You aren't allowed to do that in the regiment... or the civil service, come to that."

Absolutely right, Major.

True, turkeys will never willingly vote for Xmas. But the more people out here know about the abuses, the more chance we have of forcing them to do so.

If you missed it, set the PVR for 2.25am on Tuesday.

Sunday, April 19, 2009

Buying Votes


Elect me and I will put a stop to your free beer!

Every now and again, the stone gets lifted and we innocents at large get a shocking glimpse of how our Westminster political system actually works. We are revolted at just how sleazy and dishonest the whole process is. We are sickened by the slimey reptiles that slither out into the sunlight.

Of course, our rulers try to blame it on a few bad apples. But in truth the entire system is rotten to the core.

Take the question of buying votes. In 1868 the novelist Anthony Trollope (pic) stood for a Parliamentary by-election in the Yorkshire town of Beverley. The campaign cost him the extraordinary sum of £1,000, largely spent on a naive attempt to focus on the issues. He later wrote:

"I spent the most wretched fortnight of my manhood... It had come to pass that political cleanliness was odious to the citizens... a leading Liberal turned up his nose at me when I told him there should be no bribery, no treating, not even a pot of beer on our side!"

Clearly Trollope didn't get the hang of elections at all, utterly failing to grasp the conditions for closing the deal. No bribes, no seat. Needless to say, he lost.

So how stands Beverley today?

The town is now part of Beverley and Holderness, one of 56 Parliamentary constituencies in the Yorkshire and Humberside region. And it's one of only 12 of those seats not held by Labour.

Which is interesting. Because Labour spends very considerable sums of money - our money - in Yorkshire and Humberside, squaring its voters.

According to HMT, the region gets 17% more public spending per capita* than, say, the South East. That's pretty chunky, so you'd think the electors of Beverley would have the grace to show their appreciation in the time-honoured way.

Still, the region's other voters certainly understand which side their bread's buttered. Yorkshire and Humberside's overwhelming 79% Labour representation at Westminster compares to the South East's mere 23%.

Of course, some regions get even more of our cash. Just focusing on England (see previous posts for Scotland, Wales, and N Ireland - eg here), the North East region is the outright winner, with per capita public spending a stonking 31% above the South East. And no fewer than 93% of the North East's MPs are Labour.

Across England as a whole, the relationship between a region's receipt of public money and its election of Labour MPs is very strong.

Here's a simple chart that plots each region's public spending per capita* (relative to the average for England = 100) against its representation by Labour MPs (as a percentage of its total MPs). We have excluded London because, although it also gets a higher share of spending and elects a majority of Labour MPs, it is in many respects an outlier relative to the rest of England.


Now, for you non-statisticians, an R2 of 0.85 is pretty high. It means there is a very close association between the two sets of stats here (the correlation coefficient is 0.92, where 0 means no association and 1 is a perfect fit).

And the message is as clear as daylight - regions that elect a lot of Labour MPs can expect to be rewarded with a bigger dollop of public spending. Even Trollope would have understood.

Sorry... what's that you say?

Labour voting regions are poorer so they naturally get more public hand-outs?

Well, there may be some element of truth in that. But when you run the same analysis, only using income* in place of Labour representation, the statistical fit with public spending is markedly weaker (an R2 of 0.65). In other words, electing the right MP trumps being poor.

*Footnote The figures on public spending per capita are taken from HM Treasury's Public Expenditure Statistical Analyses 2008, and refer to so-called "identifiable spending". Regional income is gross value added from the ONS.

PS It was Harold Macmillan who famously said he enjoyed going to bed with a good Trollope. And while we're on Supermac, check out this great TV election broadcast from 1955. He very hesitant and keeps forgetting he's not addressing a public meeting, but we get a good idea of how the bonfire of controls pretty quickly gave us never-had-it-so-good. Also clock how everything they boast about taking off ration is very bad for you - sweets, butter, eggs, bacon, cooking fat, cheese... can you imagine what Nanny would say.

Saturday, April 18, 2009

Ill-Informed Squeals From The Town Hall


Cllr Carter at the glitzy opening of Kent TV - funded by taxpayers

For some reason, the TaxPayers' Alliance seems to have upset a number of local councils. One of them is Kent.

This morning, the Leader of Kent CC, Paul Carter, writes to the late lamented Torygraph* saying:

"The TaxPayers’ Alliance has received much publicity after publishing salaries of senior public sector staff gained under the Freedom of Information Act...

There is much misinformation being peddled about so called bloated salaries. I have looked back over 30 years at salary comparisons in the private sector (using my 30 years of experience in the construction business) and the public sector which shows that chief executives and senior officers in local government have not had excessive growth in their salaries.

In 30 years average salaries have increased by a factor of almost 10. Senior officers and chief executives in local government lag behind with a multiple of under eight."

In the printed paper he even includes a little table to support his assertion:

So a bricklayer is apparently earning 10 times what he got 30 years ago, a headteacher 8.75 times, and Kent's CEO a mere 7.64 times. Kent's CEO has clearly fallen behind, so the TPA should just shut up.

Hmm... bricklayers... headteachers... wonder why Mr Carter didn't make the obvious comparison, which is with the official stats on average pay from the Office for National Statistics.

Because had he done so, he would have found that over the last 30 years, the average pay of full-time adults has gone up only about 6.5 times (see summary from the National Statistician here).

So far from lagging behind, Kent's CEO has actually been roaring ahead.

As for Carter's supposed "data" on brickies and headteachers, it may have escaped his notice that the UK average pay for a brickie is £25 grand pa, and when last sighted (2006) the average headteacher was earning £52 grand pa.

Here's a thought for the voters of Kent - maybe you should get yourselves a council leader who spends his time saving your money, rather than making up spurious justifications to spend more of it, opening vanity TV stations, and losing £50m in busted Icelandic banks.

*Footnote: for the definitive commentary on the late lamented Torygraph, see the irreplaceable Guido.

Westminster Gravy Train


Stop the train - we want to get off

A date for your diary - tomorrow night at 7 pm BOM's old friend Heather Brooke is presenting her C4 Dispatches programme on the Westminster Gravy Train.

Heather is our leading campaigner for freedom of information, with a dedicated website Your Right To Know. And for five years she has been doggedly pursuing our egregious trough snuffling MPs for crimes against the taxpayer. As she writes here:

"When I first made a freedom of information request for a detailed breakdown of MPs' expenses five years ago I was pretty much laughed at. It was considered inconceivable that the average member of the public could be allowed to trawl through an MPs' 'personal' receipts...

The structure of Parliament appears to favour political insiders at the expense of the general public who pays the bills. What other person has a boss who allows an expense system like that outlined by Andrew Walker in The Green Book? Walker, the director of the Department for Finance & Administration, stated in The Green Book: 'It is your responsibility to satisfy yourself when you submit a claim.'

A must watch.

Even if it does push your blood pressure into the red zone.

Friday, April 17, 2009

A Bunch Of Bastards


Big Government art is still with us

According to Michael Lynch, the departing head of London's expensively refurbished Southbank Centre, the private sector hasn't donated nearly enough to fund his arts empire:

"Corporate Britain had in my view let down the side. They need a sense of values.”
Apparently, none of those gzillionaire Goldmans' bankers has given "anything meaningful", and he describes them as a "bunch of bastards".

Arts, you see, are A Public Good, and rich bastards have a civic duty to dig deep in their support. Everyone knows that. Just like they know that art is what the artist says it is, not what the customer says.

So it's no good Goldman bankers whining that they don't support the Southbank Centre because they think it produces a load of tosh in which they don't have the faintest interest. Philistinism (aka customer choice) is no excuse.

And it's no good them saying that they don't like the Southbank Centre's lefty employees and lefty agenda (the Centre was literally the creation of New Jerusalem Big Government for Attlee's Festival of Britain in 1951).

They have a public duty to support the arts.

The other day I heard some BBC bureaucrat - possibly the head of radio comedy - attempting to explain why BBC radio comedians are all leftwing. She said she'd love to find some rightwing comedians for her shows, but didn't know any funny ones. Apparently she believes the leftwing comedians on her shows are funny.

But are rightwing comedians irredeemably dire? Try this topical joke from Jim Davidson:
"The North Koreans have just launched a satellite round the earth. They say it's beaming back revolutionary songs... songs like the old Bowie number [sings] - Glound contlol to Kim Jong Il."
Tittering? Even if you are, you can be sure Davidson would never get the chance to air it on R4. The controller of radio comedy would think it deeply offensive to all Koleans and everyone else from east Asia.

Except it was actually a joke on last week's BBC R4 Now Show, a show so packed with the usual suspect BBC lefties, it even includes the lamentable Marcus Brigstock (and if he rates any higher on the Laughometer than Jim Davidson, I'll eat my tickling stick).

The fact is that state funded arts - be they promoted by the Southbank Centre or the BBC - are always going to pursue a Big Government agenda. They can't help themselves - artists know who pays their wages, and the controlling bureaucrats are effectively civil servants (see many previous posts eg here and here).

It's therefore entirely unsuprising that wedged bankers find such organisations unappealing, and don't want to fund them (yes, we know many bankers are currently civil servants too, but that's not their mindset).

How then did the Southbank manage to fund its costly refurbishment?

According to Lynch, “the Government, to their credit, got behind us in a big way”.

Well, that was awfully sweet of them, but - and this may be news to Mr L - the government doesn't actually have any money. In reality, once again, it was we poor schmucks who paid.

How much?

Precise details are sketchy, but we know the refurb cost £111m. And the vast bulk of that came from taxpayers (either direct from the Arts Council or the Lottery). In addition to that, the Centre is receiving a £20m a year tax-funded subsidy towards its running costs.

There are certainly some bastards involved in this, but I fancy they're not working at Goldmans.

PS Just as a reminder, we spend c £600m pa on explicit arts subsidies. But that's in addition to the £3.5bn pa telly tax, much of which also gets channelled into "the arts". Let's hope George is a philistine.

Wednesday, April 15, 2009

Lowering The Bar


Classwarmates - Commissar Balls and Sir Beardie


Lowering the bar for our public services is one of this government's most corrosive legacies. From dumbed-down exams, to fiddled crime stats, to meaningless health metrics, Labour has systematically redefined and reduced the standard of what constitutes "success".

We've had another classic example today.

As everyone in the real world knows, pupil behaviour in many state secondary schools has become a major problem, especially in our big cities. Classroom teachers have been progressively robbed of their authority - and now even have to wear body armour in class - heads no longer have an unchallenged right to expel unruly pupils (see many previous posts, including here and here), and pupils who want to learn, can't, because they lose five weeks a year through the poor discipline of others.

But you'd never guess any of that from the official school discipline ratings. According to them, 97% of state schools have satisfactory to excellent discipline.

It's so ludicrous, and so at odds with everything we all know, it seems even the Commissars have finally realised it won't fly.

So they got Sir Alan Steer - a bearded, beknighted, onside head (see pic) - to produce YET ANOTHER TEEEEEEEDIOUS 200 PAGE REPORT (you can read it here, but I warn you, you might expire in the attempt).

And Sir Alan has concluded that a "satisfactory" score for discipline doesn't actually mean satisfactory in the sense that you or I would normally interpret the word.

No.

It actually means pisspoor. In fact, it means that in the 25% of schools where discipline is rated as "satisfactory", things are so out of control that Commissar Balls has been forced to take draconian action. In a dramatic break from the past he vows:

"I will be launching a new leaflet for teachers to give them the information and backing they need."

A new leaflet! Well, that's it - job done.

Especially when you combine it with Beardie's plan to re-engage these teenage tearaways by swapping lessons for Bingo sessions.

I have to stop - I think I've just had another seizure.

PS So our old chum Shaky got a Ceascescu style dissing at Anfield. Shame. You'd almost think the common people don't appreciate the workers' paradise 12 years of socialism has given them.

The Cost Of Long Grass


An official enquiry gets underway

When the going gets tough, government ministers order an enquiry.

And whether it's the Cabinet Secretary ordered to enquire into scumbag etiquette for Special Advisors, or Lord Laming ordered to enquire into the latest horrific failure of child protection, or Lords Butler and Hutton ordered to enquire into the Iraq fiasco, the remit is always the same - take this problem off into the long grass, and lose it.

But there's always a cost. Not just in terms of, ahem, standards in public life, but also in terms of cold hard cash - taxpayers' cash.

Hard information is scarce, but we were told that Laming1 cost £3.8m, and Hutton cost £1.7m. However, those figures largely comprise external legal and other fees - they almost certainly understate the full costs of the internal civil service resources deployed.

The current record - as far as we know - is held by the Bloody Sunday enquiry, which has so far cost us nearly £200m.

Now this morning we hear that the DTI/BERR enquiry into the MG Rover collapse has cost £14.8m. And that's just so far, because although the enquiry has been grinding on for four years, it still isn't finished.

As regular readers may recall (eg see this blog), the MG Rover collapse in 2005 put up in lights just how useless Labour's DTI had become. Because it was the DTI and its ministers who were largely responsible for the company's total wipeout. As we noted:

"If it hadn't been for political interference and DTI's hamfisted meddling, BMW would have sold to Alchemy in 2000. The company would then have been downsized pretty drastically to become a specialist sportscar maker. The downsizing would have been done in a properly planned, orderly manner, paid for by the company itself, not taxpayers. And the creditors would have been paid off. Even the pension fund deficit would have been less problematic because its equity investments were worth so much more in 2000.

And as the specialist producer of MG sportscars, the company would surely have had a much better chance of survival than the clueless fag-end of a defunct volume manufacturer. So a good chunk of the jobs would still be with us today."

Following the 2005 election, Alan Johnson was appointed the new DTI Secretary of State, taking over from our old friend Commissar Hewitt. He immediately made two decisions.

First - sadly - he rescinded Hewitt's wonderful decision to rename DTI the Department of the Penis (see this post).

Second, he tackled the seething anger in the West Midlands at how the infamous Phoenix directors, who had paid just £10 for MGR, had then managed to extract £40m from the company for themselves, even as it was going down the tubes. Hence the enquiry.

And for Johnson, the enquiry was a resounding success. The grass was quite long enough to see him safely out of the DTI. Indeed, it's been so successful, it's also seen out two of his successors (Darling and Hutton).

But for us taxpayers, the upside is rather less apparent. The collapse of MGR has already cost us £250m (see this post), and now we're in for another £15m.

It's way beyond time to sharpen that scythe.

Tuesday, April 14, 2009

Druid Tythes

The Tylers' annual tythe

According to the TPA's new green tax calculator, the druid tythe is now fleecing Mrs T and I for well over a grand a year.

This is an outrage. We don't subscribe to the religion - at most we're agnostics. And we're certainly not members of the established druidical church, which is clearly intent on dragging us back to the Dark Ages.

We have two suggestions for all of you.

First, work out how much you're stumping up for the druids by using the TPA's handy calculator:




Second, read the excellent and scholarly tract by St Nigel of Blaby, where he explains precisely how the druids are attempting to con us, and sets out the true path to righteousness.

Monday, April 13, 2009

Wanted: A Long List And A Steel Heart


Yesterday the Sunday Times ran a long piece updating us on how George's List of spending cuts is coming along (summary graphic above).

Confusingly headlined Alistair Darling swings the axe - we'll believe that when we see it - the ST ticks off a number of BOM's old favourites, including: mad mega-IT projects like the £20bn ID cards scheme and the £20bn NHS supercomputer; lend-me-your-watch-and-I'll-tell-you-the-time management consultants (£2bn+ pa); useless quangos like the £90m pa Carbon Trust and the £2bn pa Regional Development Agencies; the Scottish subsidy (c £2bn pa); and culture, media and sports subsidies (we'd save £600m from arts alone).

In truth, we'd add a few others, such as government advertising (£400m pa), and the BBC (put the £3.5bn pa telly tax into the general revenue pot).
The trouble is, even when you tick off all the old favourites, it's still not enough. Labour will be leaving the public finances in such a dire state, we are going to need some seriously brutal surgery - something that will deliver savings of £50-60bn pa.

The ST graphic shows what might be required for cuts of £41bn. Surgery includes 10% off public sector pay (saving £15bn pa) and one-sixth off tax credits and Housing Benefit (saving £5bn pa). That would be hard enough to achieve, but even more is needed.
In particular, roughly half of all public spending goes on healthcare and welfare benefits (so-called social protection). To have any hope of cutting £50bn, both of those areas will have to bear their share - whatever assurances Dave may have given in the past about the NHS being sacrosanct.
It's going to be horribly difficult. It's going to produce strikes and dire headlines. It's going to feel very lonely.
George needs to do a lot more work on his list, for sure. But what he needs most is to get himself a steel heart.
PS On R4 Today this morning I listened to Commissar Johnson telling us that Gordo has no need to apologise over McBride. Apparently that's because as soon a G found out what was going on, he sacked M. Funny - I distinctly remember an entire day's delay after the story broke before M tendered his voluntary resignation. Later, several Labour callers on the R5 phone-in argued that Gordo couldn't be blamed for the dirty deeds of a subordinate. You will immediately recognise the David Irving defence - Irving being the historian who argued that Hitler couldn't be blamed for the Holocaust because it was organised by over-exhuberant subordinates behind his back and without his knowledge. Final days in the bunker, indeed.

Saturday, April 11, 2009

How Dare Fawkes Drag Mr Punch Into The Gutter?


The humbug has inserted itself again

No, I'm sorry.

The sight and sound of the appalling Mr Punch telling us that McBride only became a guttersnipe scumbag because Guido Fawkes made him, is simply too much to bear.

BAAARRRRFFFFF!!!

Ah, that's better.

Mr Punch - the notorious self-inserting arse humbug* - has just told the BBC that the only reason McBride dreamed up his slanderous smear campaign was because people like Guido have dragged politics into the personality gutter.

Apparently, our sainted rulers want to be decent honest and truthful, but they're prevented by disruptive outsiders like Guido. So they have no choice but to become lying toe rags.

How perfectly frightful for them.

And what a shame they'll have to suffer for another 12 months.

*Footnote - We've blogged pants ex-quangocrat Pound many times (eg here). He was the one who promised BBC R4 Today listeners he'd table whatever law they voted for - the Listeners' Law - but had no hesitation in reneging when he didn't like the law they chose (he called us listeners bastards for choosing the Tony Martin Law). Fortunately, his majority is only 13%, so come next year we need never hear from him again.

Another Bonus Outrage


Where there's a will...

So the Crown Prosecution Service is giving £250 of our flaming money to each of the 16% (yes, just 16%) of its employees who actually turned up for work on The Day of The Great Snows. They say they are rewarding staff who went the fabled "extra mile".

But as the TPA's Mark Wallace points out:


"Only 16% of CPS staff compared to 70% or more of staff around the rest of the country actually turned up on the day that it was snowy... Have a look at what this really rewards - it doesn't reward hard work, it rewards having a bus route that works, that runs near your house."

As regular BOM readers may recall, Mrs T and I had our own taste of going the extra mile on that same snowbound February day:

"Whereas Tyler's, and many other, councils failed to keep the show on the road (Surrey's schools are still closed), the private sector ploughed on magnificently.

Mrs T, you see, has finally had it with her disintegrating held-together-with-string kitchen and is demanding a new one. So she'd arranged for a bespoke kitchen man to call on us at 11am yesterday.

Well, obviously he wasn't going to make it because Tyler Towers was under unfathomable feet of snow and our country road was blocked - no, really, with council gritters nowhere in sight.

But amazingly, just before 11, this Scott of the Antarctic figure appeared though the swirling snow, literally up to his knees in the stuff. He was wearing a bright yellow sailing survival suit and had walked for two miles down a snowbound lane to reach us.

And that my friends is the power of the market."

We naturally made sure Capt Scott's boss heard of his man's heroism, and how impressed we were. But I'll bet he got no special bonus.

Now it is true that the CPS is one of the very worst outposts of government. When the Public Accounts Committee looked at it, they found amateurish working practices, endemic incompetence, and gripless management (see this blog). Incomplete files, unanswered phones, uncontactable lawyers (never heard of Blackberries), and abysmal lack of urgency, are all taken for granted inside the CPS.

But as we've blogged many times, the public sector pays bonuses for all manner of things that are taken for granted by private employers. We reckon it costs us well over £1bn pa, and it's pretty well money down the drain.

And don't get me started on sickies. As we've noted many times, sick leave in the public sector runs about 40% higher than the private sector, and in some areas it's even worse: in the NHS it averages two-and-a-half weeks a year (against a private sector average of 7 days).

M'learned friend the Village Postmaster reckons extensive sick leave is ultimately a failure of management. In his own shop, just like at Tesco and many other leading retailers, nobody gets sick pay for the first three days, and unauthorised absenteeism is non-existent.

So that's two more items for George's list - bonuses and sickies. Abolishing public sector bonuses would save c £1bn pa, and cutting public sector sickies down to the private sector level would save another £3bn pa.

£4bn pa.

QED.

PS Talking of George, he's reportedly one of the intended targets of the obscene McBride/Drooper conspiracy so brilliantly exposed today by Guido. But what the Major and I want to know is WTF Brown hasn't immediately sacked McBride? Even he can't imagine we're happy supporting his low-life scumbag mates out of our taxes.

Friday, April 10, 2009

Wealth Wipe-Out


Property Ladder 2009 makeover

Was it only two years ago that property was still a miraculous money-making machine? All those bumbling halfwits on Sarah Beeny making a mint with a few B&Q light fittings and a pot of magnolia paint? It seems like a dream.

As we know, Labour's vaunted economic boom was built on a gigantic property bubble - the one that now has the ugly gash in its side and has already deflated by 20%. And we can see just how important that bubble was by looking at the official stats on Britain's wealth.

As at end-2007 (the most recent ONS data), national wealth stood at £7 trillion - around 5 times our annual GDP, or around £275,000 for every household in the land. Over the previous decade, it had increased by an astonishing 120% - ie it more than doubled. Which was nice.

But when you look more closely, it turns out that fully three-quarters of that increase came from residential property, which went up by 200%. By 2007 it comprised nearly two-thirds of our entire national wealth:



Now feelgoodwise, there's no denying that the property bubble felt good - like, money-for-nothing reeeeal good (well, reeeeeal good assuming you'd already bought, of course).

And there's no denying we acted accordingly. The construction industry boomed, as did the DIY industry. Estate agents did well, along with those suppliers of TV property porn. And as property owners we were also able to borrow extra spending money against the spiralling value of our homes.

This last effect - known as Home Equity Withdrawal (HEW) - was very powerful. Here's a chart of the Bank of England's stats on equity withdrawal as a percentage of households' post-tax income:

So in 2003, households were borrowing 7-8% of their net income against the value of their existing homes just to spend - the highest we have ever seen (the long-term average is 2.5%). In the decade to 2007 we borrowed £320bn in this way.

Now that's all fine and large, but we failed to remember a couple of key points.

First, unlike productive assets like factories, equipment, and infrastructure, or earning assets like financial investments, owning your own home generates no money income. When you borrow more against it, there is no corresponding earnings stream to service the debt. You certainly benefit from living in your home rent free, but you have to find the debt service payments out of your existing income.

Second, although you can always sell your home to pay off the debt, property transactions costs (Stamp Duty, estate agent fees etc) are high, it can be difficult to find a buyer (especially in a market downturn), and you've then got to find somewhere else to live. You don't generally have the option of selling a bit of your home, as you would with more liquid investments like unit trusts or gold bars.

And now that our wonderful money-machine has gone into reverse, we've also remembered something else - our homes are only ever worth what someone else will pay for them. And once prices reach levels where many new buyers are effectively priced out of the market, there's ultimately nothing supporting our housing "wealth" but thin air.

Tyler's fag packet says that the 20% fall in property prices we've already seen has wiped out getting on for £1 trillion of our national "wealth". We could easily see another £1 trillion disappear - all of it making us feel poorer and spend less.

True, the acceleration in inflation next year may push money prices back up again. But in real terms, go-go house prices and feelgood wealth will be a distant memory. No wonder Sarah B has moved into the lurve business.

PS So can Cam mend our broken economy? Murdoch's Wall Street Journal is somewhat less than optimistic: "Many Conservatives fear Mr. Cameron will become prime minister, only to be quickly exposed as a poll-driven "heir to Blair" who treads water a few years and then loses. What every American should understand is that this is not a test of "modern conservatism." It's a test only of whether an opposition that voices no coherent ideology can succeed when the ruling party stumbles." How the world changes. I well recall studying comparative political institutions 40 years ago, and learning that US party politics had no place for ideological differences. Our system was reckoned to be far superior, offering voters a proper choice (yes, I know - Heath vs Wislon - but since they were both Oxford men, they were superior by definition).

Wednesday, April 08, 2009

Grasping The Public Sector Pay Nettle


George might need gloves for this one


We've blogged public sector pay many times, including the issue of those portly moggies snuggled up in Town Halls and quangos throughout the land.

The TaxPayers' Alliance has just published this year's Town Hall Rich List. It seems that despite our slumping economy, the number of council officials earning more than £100K pa has increased again, to 1,022. And that excludes the value of their index-linked final salary pensions.

Outstanding.

We've also just had an extraordinary insight into the staff bonuses now routinely paid by many of the same councils.

According to C4 News, the top bonus paying council is Birmingham, which last year shelled out nearly £10m on them. And C4 almost got an answer to the age-old question of how many council workers it takes to change a light bulb - Sefton Council apparently paid a £21 grand bonus to a highly productive "senior lighting operative". Nice work if you can get it.

As BOM readers will know (eg see this post), public sector bonuses are a complete farce. Across the whole public sector, we reckon they cost us well over £1bn pa (5.8m employees with an average bonus of c£200 pa). And it's £1bn down the drain.

Because unlike bonuses in the private sector, public sector bonuses are not linked back to some clearcut measure of success like profit. Instead, they are paid out on the basis of individuals meeting one or other wibbly set of Commissariat targets. Such targets rarely have anything to do with satisfying customers (for a classic example, see this post on the £36 grand bonus paid to the head of the useless Learning and Skills Council; he got the money because he had supposedly "met all his objectives"; yet last month he had to be"resigned" for running an organisation so hopeless it's managed to bankrupt half our further education colleges).

Still, the landscape is changing. When the TPA first started scrutinising public sector pay, it took no end of flak for picking on people who are supposedly poorly rewarded relative to the private sector. But with private sector pay now heading down the tubes, there is an increasing demand that public employees should share the pain (eg see Camilla Cavendish in this morning's Times).

Let's remind ourselves of some facts. The story up to last April (the ONS's latest Annual Survey of Hours and Earnings) was that overall public sector pay compared well with the private sector (figures relate to full-time gross pay, including bonuses):

  • Average pay - £582 per week in the public sector, compared to £574pw in the private sector - so the public sector was marginally ahead
  • Median pay - £523pw public sector, compared to £461pw in the private - so the typical public sector worker was 13% ahead
  • Pay increase since 1997 - median pay in the public sector had increased by 49.6%, compared to 48.8% in the private sector - so once again the public sector was marginally ahead

But that was only up to last April. Since then, the public sector has stormed ahead. Here's a chart showing the astonishing increase in average public sector earnings relative to private sector earnings over the most recent 12-month period:

The reason for the increase is that while private sector earnings have gone down by over 1% - reflecting pay cuts and the shredding of bonuses - public sector pay is still bounding merrily ahead by an average 4% pa.

And it's no good arguing (as eg Pol does - see here) that this is simply correcting for some longer-term public sector shortfall built up during the boom. We can see that by looking at the same chart stretched out over the last decade:

So overall, public sector employees did not fall behind during the go-go years.

Yet now, their earnings apparently remain immune. The pain is all being heaped on the private sector.

No wonder people are talking of "pay apartheid", and calling for Labour's three-year public sector pay deals to be reopened: with the country facing an unprecedented squeeze, this is an unfairness too far.

Taxpayers should insist on these deals being renegotiated. With the public sector pay bill running around £160bn pa, a 2-3% pay uplift costs us £3-5bn. And it's cumulative - after three years, the additional annual cost is running at £10-15bn. Or 3-4 pence on the standard rate of income tax.

It's yet another nettle for George to grasp on Day One.

Let's hope he's got thick gloves.

And let's hope he and Dave have A Plan for dealing with the public sector strikes (see this post).