Saturday, December 18, 2010

A Christmas Riddle

BOM is closing down for Christmas. But before we go let's leave you with a riddle to ponder over the mince pies.

Tyler has been doing some more work on the pay gap between the public and private sectors. As everyone surely knows by now, average public sector pay is considerably higher than private sector pay. When we last blogged it, we reckoned the public sector premium stands at an astonishing 50% - once we take account of the full cost of those gold plated pensions.

How did we reach that conclusion? We based it on the following analysis from the Office for National Statistics, which compares the public and private sectors in terms of both gross pay and total reward (ie including employers' pension contributions):

The conclusion is overwhelming - for both men and women, for both high and low earners, for incomes including and excluding pensions, public sector employees do much better than private sector. The median full-time employee in the public sector gets nearly 30% more than his/her counterpart in the private sector, once we take account of the employer's pension contribution.

And in truth, the public sector does even better than the ONS numbers suggest. That's because the ONS only takes account of the employers' explicit pension contribution, a contribution that hugely understates the true cost of public sector pensions.

As we blogged here, the true cost of public sector pensions as a percentage of salary averages around 25% more than current pension contributions. Which means that we need to gross up the public sector total reward numbers even further. At the median income level that takes the public sector premium up to a staggering 50%+.

All of which is pretty shocking.

But the public sector unions and their supporters have come up with an answer. They say that the public sector premium reflects the fact that public sector employees are on average better qualified than their private sector counterparts.

Here for example is what the TUC says:
"The obvious retort to the small-state brigade when they harp on about average pay [do they mean us?] is that the private and public sector workforces are different. As the private sector employs more unskilled workers on the minimum wage than the public sector, and the public sector has a high proportion of professional workers (such as teachers and doctors) it is not surprising that average pay is higher in the public sector...

...there has been a big growth in employment of graduates in the public sector over the last ten years – much bigger than in the private sector. Even in 1998 the public sector was already employing more graduates. Given that graduates are paid more than others, this in itself would tend to make average public sector pay higher. There are quite significant decreases in the proportion of public sector staff with higher education short of a degree (which we will call diplomas for simplicity) and those with other qualifications."
And the TUC is quite right - the proportion of public sector employees who are graduates is indeed much higher than it is in the private sector. In fact, at nearly 40%, it is twice as high.

Now, the TUC reckons that explains why public sector pay is higher. They're better qualified than the dolts working in the private sector, so naturally they get paid more.

Whether qualification and other differences really do explain the earnings gap is the very thing Tyler is currently attempting to bottom out. But it raises another perhaps even more critical question - in our current parlous economic state can it possibly make sense to have so many of our expensively educated graduates working in the public sector?

Because as the TUC highlights, although the public sector "only" employs just over 20% of Britain's manpower, it employs 40% of our graduates. 40%.

Can we afford to have 40% of our best brains working in the non-wealth producing public sector? Don't we need them in the private sector creating the prosperity that will power us out of Labour's economic crater?

That's a real Christmas riddle.

What's that?

Most of those supposed public sector grads are no such thing? Their growth merely reflects the "significant decreases in the proportion of public sector staff with higher education short of a degree (which we will call diplomas for simplicity)"? Many of those new public sector grads are merely redesignated diploma holders (like nurses)?

Hmm. You've probably got a point there.


The mince pies are calling. Happy Christmas everyone.

Thursday, December 16, 2010

New Cake Slicer Required

That doesn't look fair somehow

When all else fails, look at the facts. Tyler has been spending so much time screaming at those free-loading students on the telly, that he temporarily forgot that vital insight.

As we blogged here, Lord Browne's recommendations on higher education funding were spot on, and we strongly support their swift implementation by the government. It simply isn't fair that taxpayers should pick up the tab for uni courses, when it's the students themselves who get the lion's share of the benefits. Why should we pay for them to schlep their way into higher income jobs?

As Browne's report shows, the average male graduate can currently expect to receive a boost to his lifetime income of around $200,000. And although the boost for female grads is less, it's still well worth having.

But the question we taxpayers need answering is how much do we get? Given that we've been paying the bulk of the costs, what have we had back?

Because although we keep hearing students and academics telling us that we'll all benefit from graduates "boosting the economy", there is a distinct lack of fact to go with such assertions. How much benefit, and how does it stack up against the costs?

So here are a few facts, taken from this paper produced for the European Commission.

The critical calculation goes by the snappy title "the public rate of return to tertiary education". No, don't switch off. All it means is we're comparing the extra income generated by these higher earning grads in future (as against the income they'd have generated without a degree), to the costs of putting them through uni (including the loss of income they'd have generated had they been out working). And we express that return as an annual percentage, just like the interest rate on your building society account.

Anyway, despite the explosion of M Mouse degrees and the general dumbing down we all know about, it turns out that this return is still quite respectable. According to the OECD, the average UK graduate currently generates a public rate of return of around 6.5% pa. In other words, by investing in his university education, society gets a return of 6.5% pa over the next 40 years*.

Now that's not bad in today's circs - much better than the 0.5% pa paid on a typical bank savings account. In fact, it's much better than Tyler assumed (hence the need for facts). So we really shouldn't knock it.

But the key question is how does that 6.5% return get divvied up? Who gets it - the individual student or society as a whole (aka the taxpayer)?

It turns out that here in the UK, the graduate does very well indeed. Although the overall public return is only 6.5%, the average graduate's return (according to the OECD) is 14.4% pa - well over twice as much.

How? How can the grad get so much? Simple - he doesn't have to pay anything like the full cost of his university education.

But if the grad gets much more than 6.5%, that means the rest of us must be getting less - we know the size of the cake, and if he gets a bigger slice, we get a smaller one.

So is that fair? Is that a fair division of the spoils?

I submit to you that it isn't. And when we look at other countries, we can see that the division is much less fair here than it is elsewhere. Here are the OECD figures for a range of European countries, showing how the gap between the private return (the slice going to students) and the social return (the fixed cake) is higher here than anywhere else, except the Czech Republic, Portugal, and Switzerland.

Looked at in that light, it seems pretty clear some rebalancing is required. We need to reallocate some of the return away from the students themselves back to society in general. And higher fees are an excellent way of achieving that.

There's one other interesting factual snippet in this EC paper, on the question of whacking students from poor backgrounds.

We've been hearing a lot about how the higher debts driven by higher fees will put off poor students from going to uni. And how that isn't fair.

But it turns out that from a financial standpoint - even when they can access higher edcuation - students from poorer backgrounds don't get nearly as much out of it as richer students. It seems that the return for richer UK students is getting on for three times that for poor students.


Here's the long version:

"Overall, the expansion of tertiary education in OECD appears to have had little impact on the relative prospects of young people from less advantaged backgrounds. This is hardly a surprising finding. Parental and school influences are extremely important determinants of participation at post-compulsory level. In most countries tertiary education requires prior qualifications -- generally at upper-secondary level – so that attainment in the compulsory phase of education, as much as anything which occurs subsequently, is a key to tertiary participation. Therefore, the expansion of capacity at the tertiary level will not, in itself, have much impact on these factors. The challenge to public policy of delivering equality of opportunity in tertiary education is sizeable, and falls not only on the system for tertiary education itself, but also on support for children and their families, reaching back to pre-schooling and into compulsory and upper-secondary schooling."
The short version? The damage is done long before university level. If we really want to help kids at the bottom, we need a radical improvement in our state schools.

Sounds familiar somehow.

*Footnote. Yes you're right - the OECD numbers are based on what yesterday's graduates of different ages are earning today. And actually that may not be a good guide to what today's grads will earn over their lifetimes tomorrow. So with dumbed down degrees etc, the OECD's numbers may very well overstate the prospective return to uni education today.

Wednesday, December 15, 2010

Cost Of Bank Bail-Outs

A very rocky road, and still a mountain to climb

This morning's National Audit Office report on the cost of bank bail-outs is being headlined as saying taxpayers will likely escape without loss. But it actually says nothing of the kind.

True, the NAO tells us taxpayer exposure to the special guarantee and indeminity schemes (the Asset Protection Scheme, the Special Liquidity Scheme, and the Credit Guarantee Scheme) has halved to around £500bn. But:
"The Treasury retains the unquantifiable ultimate risk of supporting banks should they threaten the stability of the overall financial system. The outstanding £512 billion is only on the explicit support already provided. Further intensification of financial instability may require additional intervention."
That massive implicit guarantee is one we've blogged many times. And let's be under no illusions - at a time when there are still huge uncertainties surrounding the creditworthimess of banks right across Europe, the market reckons our two big nationalised banks remain pretty risky.

As the NAO highlights, the market price for insuring against default by RBS or Lloyds has remained right at the top of the range for similarly sized European banks (NB a 5 year Credit Default Swap cost of 200 basis points pa roughly means the market reckons there's at least a 2% chance of default within 1 year, implying at least a 1-in-10 chance of default within 5 years).

And with that level of risk, unsurprisingly our banks have underperformed other banks in the equity market:

In other words, we're still propping up two relatively high risk megabanks that the market doesn't much like the look of.

And there's another point the NAO highlights. In order to inject funds into the banks, the government has had to borrow more. And that costs. According to the NAO:

"...the Government is paying some £5 billion a year (£10 billion so far) in interest on the Government borrowing raised to finance the purchase of shares and loans to banks. This ongoing cost is material in terms of the overall public finances and deficit. This £5 billion a year was not included in the Treasury’s previous estimates of the loss to the taxpayer, because the Treasury does not consider them to be direct costs. The estimated £5 billion a year interest on this debt is 11 per cent of the total £44 billion forecast to be paid in interest on public sector debt in 2010-11."
Whatever it says in the headline, the bottom line is that we ain't out of jail yet. Not by a long chalk.

Tuesday, December 14, 2010

Proverbial Hawks

No Proverbial Hawks listed

So Deputy Governor Bean says that he and his colleagues at the Bank of England are watching inflation "like proverbial hawks".

Hmm. You have to wonder whether Proverbial Hawks watch the right bit of the field.

Because today's inflation figures have yet again surprised on the upside. CPI inflation has moved back up to 3.3%, and RPI inflation is back up to 4.7%. Inflation has been above the official 2% target for 39 out of the last 48 months, and with VAT going up to 20% in January that record is set to get even worse. Some hawk.

In Tyler's experience what actually happens is this: the economics establishment lock themselves into a particular world view and find it incredibly difficult to admit they've got it wrong. Even when the numbers start telling a different story, people cling on to their world view and explain away the numbers as a temporary aberration.

OK, the facts are these.

In the two years since Lehman blew up and we were told we faced the unfathomable horrors of deflation, the overall price level has increased by 5.2% (CPI). Prices have not fallen. We have not had deflation.

The impetus - as we've blogged many times - has come from import prices. The combination of weak sterling and soaring world commodity prices has pushed up the cost of our imports by 10%.

The Bank and others have argued that we can live with that, because it hasn't fed through into wage increases. In other words, there is no 70s style wage-price spiral in the making.

But wages have certainly not been flat. Despite the rise in unemployment and widespread concern about job security, average earnings have still gone up by over 3%. And although the recovery has only just started, one-third of firms are already reporting skills shortages. As they say in labour market circles, watch this space.

Of course, there is that other explanation for the Bank's inaction - the not-so secret plan to inflate away the UK's debts.

Like we've said before - sell money.

PS A great shame that Mr Dale has pulled the plug on regular blogging. He was one of the original UK political bloggers and was always well worth worth reading. He'll be missed.

Monday, December 13, 2010

So Who Do You Want To Carry?

I NY. Not.

Back in the 70s the Big Apple nearly went bust. After years of gross fiscal incontinence under Mayors of both parties, the City of New York was on the skids.

Naturally, they turned for help to their fellow Americans - the folk with whom they had been bonded for two whole centuries, one nation under God.

And you know what their fellow Americans said?

Drop Dead. That's what they said. You got yourselves into this mess, so you can get yourselves out of it. Besides which, we never liked you anyway.

Four decades on, and five little PIIGieS find themselves facing a very similar predicament. Because although the Greeks and the Irish have so far been bailed-out by Northern European taxpayers (including us), nobody seriously believes that's the end of the matter. The fiscal deficits and banking debts of the PIIGS are way beyond their own ability to fund, and way beyond the total European bail-out fund already established.

But will Northern Europe's taxpayers be prepared to shell out even more to rescue the PIIGS? Will they want to carry that weight for a bunch of spendthrift Latinos who spend half the day dossing around in the shade, and with whom historic relations are perhaps best described as troubled?

This morning Boris highlights the issue. Just like he and we Eurosceptics have always said, it turns out Northern Europe's taxpayers really don't want to pay for the profligacy of others. Your average German does not recognise a duty to support the Spaniard.

Quite rightly, Boris demands an apology from all those arrogant half-baked Europhiles who denied there was a problem and wanted us to join the Euro - the ones who wrote us all off as "xenophobic, garlic-hating defenders of the pint and the yard and the good old bread-filled British banger".

Ah yes, how right he is.

Yet there's one bit of Boris's argument that sent the Tyler eyebows twitching skywards. Contrasting the disparate tribes of Europe with the cohesive whole that is Albion, he says:
"London contributes massively in net tax revenues to the rest of the UK, and by and large Londoners accept that this is part of belonging to a single political entity."
By and large, hmmm? A nice phrase, and a nice way of reminding the rest of Britain that they'd better keep the Golden Goose of Londinium sweet. Because to our certain knowledge, there are increasing numbers of London taxpayers who most definitely do not accept that their taxes should be carted off to fund the Picts and the Celts.

We've blogged the regional unfairness of Britain's fiscal arrangements many times (eg here). But just as a reminder, here's the latest analysis from Oxford Economics. It shows that Londoners are made to contribute a net £2 grand pa per head. That is, the average Londoner pays £2 grand pa more in tax than he gets back in terms of public spending:

As we can see, the only regions that actually make a net contribution are London, the South East, and the Eastern region - together comprising the Greater South East. Every single other region takes more than they pay (and in Scotland's case, Oxford Economics have allocated to them all North Sea taxes).

It's been like this for as long as anyone can remember, and the obvious question is why do those living in the Greater South East put up with it? Without the fiscal drain to subsidise the other regions, the average family in the Greater South East would be getting on for £5000 pa better off.  That's serious money, and you'd think most families would notice.

Which brings us to today's Localism Bill.

As regular readers will know, we're great fans of localism (eg see here). We absolutely believe that local councils should have greater authority over the services they provide, so they can respond both to local priorities, and to local cost conditions. So to that extent we welcome the Bill.

Unfortunately, as far as we can see, the Bill does not address the single most important requirement for localism to work - sorting out the money. What would really concentrate minds in local councils, and would make local electors really focus on the issue, would be if councils had to raise much more of their own money for themselves (aka fiscal decentralisation).

As things stand, they get the vast bulk of their cash from Whitehall, and they get it whether or not they satisfy local electors. Indeed, we have just about the most centralised system of local council finance anywhere in the developed world (eg see this blog).

It is a recipe for continued inefficiency at the local level, and a recipe for continued fiscal transfers from the productive to the less productive.

One day in the tough years to come, the Greater South East is going to wake up. One day, its families are going to look at that £5 grand pa being carted off elsewhere and ask why? One day, its taxpayers are going to tell the rest of the country to drop dead.

PS This morning's R4 Today gave us yet another example of BBC statism. According to them, the main problem with Pickles' localism is that it might result in mad-cap councils doing mad-cap things, and surely government has a responsibility to stop that. Like Whitehall has got everything taped.

Saturday, December 11, 2010

Spotted By BOM Correspondents

BOM correspondents have spotted the following, including news of some real old favourites:

1. NHS Supercomputer still haemorrhaging cash

Were you by any chance under the impression that our new broom government had scrapped Blair's wildly expensive and wildly useless NHS Supercomputer (see many previous blogs)? Er, no. All they've actually done is attempt to renegotiate the contracts with the IT suppliers.

AMB highlights an interesting post on the latest position by Tony Collins, the former Editor of Computer Weekly and a man who did much to expose the lunacy in the first place. He tells us that the Department of Health are signing a new agreement with one of the main suppliers (CSC) to deploy a system (Lorenzo) that the hospitals themselves don't want and may never use. Collins writes:
"The deal will commit CSC to deploying the Lorenzo system to NHS trusts that have no intention of deploying it; and the deal commits the DoH to paying CSC for a minimum number of Lorenzo deployments even if NHS trusts don't actually deploy the system.

For some in the NHS, the deal will mark a new low in the history of the NHS IT programme. It may also show why central government is congenitally ill-suited to signing big IT contracts."
So WTF is Lansley's Health Department doing this?

Well, on the positive side, the new agreement will apparently save around £0.5bn compared to the previous contracts. But it will still leave this bit - that may well not ever be used - costing us £2.7bn. That aside, Collins suggests three other highly plausible explanations for the Department going ahead:
  1. Pulling the plug might have led to CSC suing the Department, just as another main contractor (Fujitsu) is already doing
  2. It "defers any day of reckoning within Whitehall over what many in the NHS regard as a failed programme"
  3. It "relieves the health minister Simon Burns from taking any tough decisions about the future of the NPfIT, at least for the time being".
And the cost to us taxpayers? As always, it's virtually impossible to know. All we can say is that the Supercomputer has already cost us something like £6bn, for which we have got sweet FA in terms of value.

(PS This of course is not the first Labour contract our new government has tried and failed to get out of. The contract for those two new aircraft carriers had been so heavily tilted against taxpayers that it was actually cheaper to carry on rather than pull the plug. Even though we can't now afford the aircraft to go on them, and we will have the first navy ever to sail two carriers with nothing to carry. Nelson must be spinning - see this blog)

2. Student Loans Company still malfunctioning

Peter T highlights the fact that the Student Loans Company (SLC) is still not managing to pay loans on time when they are needed. In other words, despite all their promises to do better in 2010 after the shambles of 2009, the SLC still failed to pay 26% of students by the first day of term this year.

Which meant of course that many students were forced to look for emergency employment so they could eat. Bar-keeping and lap-dancing may well be good experience for later life, but that's not what we pay the SLC £94m pa in administration cost to deliver.

3. British Council still cocking-up

David Blackie reports on the latest cock-up by our old friends at the British Council.

The BC has a marketing arm for British education institutions seeking to sell courses to overseas students - Education UK. It was established a few years ago to provide a Big Government Solution in place of the private marketing operations that had existed previously. And yep, you guessed it - it's a disaster.

In fact, it's so shambolic, and its website is so dysfunctional, that the BC has now been forced to refund subscriptions to participating institutions. David writes:
"...the organisation has used taxpayers’ money and the machinery of government to send students to a site which is so bad that everyone gets their money back. Well, actually not everybody, because there will be no refund to the taxpayer for the extraordinary waste of public money, no refund to the schools and colleges who have lost business as students, parents and agents gave up trying to use a dysfunctional site, and – interest declared – no refund to the businesses compromised by the organisation using taxpayers’ money to divert monies into its own pockets."
As we've blogged many times, the hopeless BC should be abolished. And we're seriously disappointed that Cam has not only allowed it to survive, but reportedly clasped it to his bosom on those recent trips out East.


4. International sports bunfights still losing money

Bobby Charlton (hmm... sounds familiar somehow) emailed to point out that South Africa didn't make nearly as much out of the 2010 World Cup as had been billed:
"South Africa made a return of just £323m on the £3bn it spent on building stadiums and infrastructure for this summer's tournament, according to official figures

Mike Schussler, director of consultants, said: "The country made a bit of money but less than expected. We got a small part of the ticket sales and the foreign visitors' spending, but it's not as much as we expected."
Well, who'd have possibly guessed that?

Thank God we got shafted by that nice Mr Blatter.

Friday, December 10, 2010

Season Of Goodwill

The Major has made his view very clear:

"Why the bloody hell should we law-abiding taxpayers tolerate a bunch of freeloading welfare scroungers smashing up London? We spend God knows how much on these revolting students - and will still do so even after the fees increase. But just look how they thank us! Why should we give them anything?! If they want to spend three years dossing around and rioting, let them pay for it themselves. And I'll bet half those scum desecrating the Cenotaph yesterday aren't even students at all - they'll be anarchists. And we'll be paying them! Housing benefit, child benefit, incapacity benefit... you name it.

It's time to draw the line - anybody convicted of violent disorder should go to jail - hard labour - and then lose all their welfare benefits for ever. Period. In future, if they want to eat they have to work like everyone else. And if they think they can rob instead, we'll lock them up somewhere where they will have to work. I'll get my mate Gomulka to organise something with the Soviets out East - that'll soon wipe the smile off their faces."

Now, of course, nobody objects to peaceful protest. No, indeed.

Well, that is, nobody objects to peaceful protest as long as it doesn't inconvenience us. And as long as it doesn't require us to pick up some huge tab for police overtime. So long as it takes place on a Sunday afternoon in say, a field somewhere outside Milton Keynes, and so long as the protesters pay for the policing, like in a football match, then everything's cool. In fact, under those circs, we might even allow a little recreational effigy burning - a weekly bonfire night for young people to let off steam. Kind of idea.

But who exactly are these rioters, and who is paying to keep them alive?

According to police hunting down those involved in the previous riot - the one last month at Tory HQ in Millbank - they are mainly teenage students of one kind or another. They say:
"We are finding that many of these people are young students who do not seem to have been in any trouble before. It appears they may have been provoked by more anarchist groups.

From a parent's point of view it must be very concerning. These are young people committing really serious offences which I suspect may result in prison sentences for some." (The maximum sentence for violent disorder is 5 years)
Provoked by anarchists? Certainly when you look at the wanted poster, one or two do look older than teenage:

But who are these anarchists exactly?

Google's anarchist UK trail leads straight to the Anarchist Federation. But can they be in any way credible? Are real anarchists allowed to participate in such a restrictive and preposterous construct as a federation? It sounds more like the Mothers' Union. Besides, there's something seriously hollow about an organisation that wants to abolish oppressive government on the one hand, while maintaining Big Government spending on the other.

Googling Operation Malone - the police man-hunt for November's rioters - gives some far more promising leads.

Ian Bone (great name) is a veteran anarchist of 63. During the 80s he ran a newspaper called Class War, featuring pix of beaten-up policemen. And here he is addressing a Class War meeting in 1985 (parental discretion advised - some of his opinions are seriously juvenile - precisely the kind of thing which might appeal to disaffected teenagers at the University of Neverpay):

Anyway, Bone has some blogposts on the current riots that simply blew the Major away. For example, under the headline What a magnificent inspiring day - the London mob is fucking back Mr B writes:
"I salute everyone who atacked the police, the treasury, the Supreme Court, the Royal family, the tax avoiders today – a quite heroic and brave acievement. Full report tomorrow – ALL HAIL – IT’S THE POLL TAX RIOT MARK 2 – ‘we come from the slums of London……"
Now that's more like it. According to his own autobiography, Bone is the son of a butler and a housemaid (no, really) and obviously carries deep psychological scars from his parents' life below stairs:

"It is fucking phenomenol. the rich are targets whether its the Bullingdon Club, the Royals or Sir Philip Green... Yesterday was reminiscent of both the poll Tax Riot and the Gordon riots as a rich hating mob stormed through the streets... Organise and celebrate yesterday comrades…but theres more coming the way of the fucking rich…..much more.’WE COME FROM THE SLUMS OF LONDON’
All of which is absolutely fine.

Well, fine except for any incitement to riot bits obviously.

But what we need to know is how does Bone support himself?

He has published three books, including the carefully nuanced "Bash the Rich". But given that B the R is currently standing at 76,361 in the Amazon best seller list, you'd have to guess he has some other source of income. And his website gives no other clues.

One of those oldies' jobs in B&Q? At 63 it's possible.

A family inheritance? Seems a tad unlikely.

Money from Putin? In the 80s, Class War and its ilk were widely thought to have been financed by the KGB, so that has to be a runner.

But the Major reckons Bone and his like must be on some kind of welfare deal.

Unfortunately we have no way of finding out.

In this season of goodwill to all men, let's hope someone round at the DWP is looking into the entire question right now.


Meanwhile on an altogether more seasonal level, we've just updated the TaxPayers' Alliance Tax on Christmas paper.

We reckon that taxes on Xmas spending this year will cost the average family £283. The overall bill will be £7.2bn, an astonishing 40% increase on 2008, when we last did the calc.

Part of the increase has been driven by the growth in Xmas spending, 2008 coming immediately after the Lehman crisis. But the majority of it reflects higher tax rates - the hike in VAT from 15% back up to 17.5%, plus increases in various fuel and excise duties.

And the really bad news is that VAT increases again on 4 Jan to 20%. According to Treasury forecasts, the rise will cost the average family nearly £500 pa, taking the average family VAT bill above £4000 pa for the very first time.

Happy Xmas everyone.

Wednesday, December 08, 2010

Are We Spending Too Much On Education?

How more can be less

Education, education, education.

And sure enough, during Labour's time in office, they whacked up state education spending by an astonishing 73% in real inflation adjusted terms. By 2009-10 spending had increased to £88.3bn - around £8 grand pa for every pupil and student between 5 and 21.

But what precisely have we taxpayers had in return? Where's the pay-off?

You can forget all those fiddled tractor production stats - as everybody now understands, they're not worth the dumbed down exam papers they're written on.

Much more important is yesterday's report from the OECD - the 2009 results from their Programme for International Student Assessment (PISA). That is based on a consistent and regular set of tests sat by 15 year olds across over 60 developed countries. And what it shows is us sinking further down the international league tables with each year that passes.

The Mail has a useful summary:

What should we make of that?

Some argue that it's largely a question of race - we're simply not as bright as the superbrains out East, and we just need to accept that as they build up their education systems we will sink ever further behind.

But even if true, that doesn't explain why we're so much worse than European countries like Finland and, gulp, Estonia.

Immigrants then. Some argue that Finland and others do well because they have far fewer immigrants dragging down the overall scores.

But while with 10.6% immigrant pupils we are much higher than say Finland, other countries with high immigrant percentages also do much better than us. For example, Canada and Australia both have higher percentages, yet both beat us in the league tables.

No, the real problem seems to lie with our school system rather than the pupil mix per se. Despite a huge additional injection of cash, we still aren't getting the results we need - in fact, we seem to be going backwards.

Which raises the obvious question as to whether spending all that extra money was worth it? And whether in these straitened times we ought to cut some of it back?

Because what the OECD report also highlights is that although we are now among the world's top education spenders, others achieve similar or better results while spending much less:
"Only seven OECD countries spend more per student than the United Kingdom...

[but]... moderate spending per student cannot automatically be equated with poor performance by education systems. For example, Estonia and Poland, which spend around US$ 40 000 per student, perform at the same level as Norway and the United States, which spend over US$ 100 000 per student. Similarly, New Zealand, one of the highest performing countries in reading, spends well below the average per student. While the United Kingdom spends almost US$ 85 000, Germany or Hungary achieve a similar average performance and spend around US$ 63 000 and US$ 44 000 respectively."
So if we cut spending back to say German levels, then according to Tyler's fag packet we could save an average $22k over each pupil's 10 years of school education up to age 15. Which works out at an annual saving to taxpayers of around £10bn pa. Not bad.

And it isn't just schools. When last sighted (2006) we were spending 5.9% of our GDP on education as a whole, whereas Germany was spending only 4.8%. Which is equivalent to about £15bn pa - money British taxpayers could save if we cut back to German spending levels.

And remember this - in this post-bubble world, Germany is beating the pants off us. Jeremy Warner has the picture story here including this chart that shows how much lower is their youth unemployment:

It seems German companies actually want to employ the products of German schools.

So what does Germany do right and we do wrong?

Hmm... now, let me see... what could it be... ah yes, selection. That thing nobody is allowed to mention here any more.

It is surely time to ask ourselves a serious question - can we any longer afford an education system that is run by the social engineering commissariat? Prizes for all and A*s all round was a lovely way of spending the last days of summer, but winter's here now.

In this new and tougher world nobody owes us a living. We need an education system that prioritises academic excellence for those with the ability to generate our future wealth, and a strong grasp of basic skills for those at the bottom - it is shocking that the OECD finds that after a decade or more of schooling, 20% of our 15 year olds are functionally illiterate.

Germany shows it can be done. We can get over the fact that our school pupils are not all Chinese. We can cope with the fact that over 10% of our pupils are immigrants. And we can even save £10 - £15bn pa in the process.

We just need to grasp one nettle.

And this time, we should do it properly and fairly (see this blog).

PS And while we're on the subject, Tyler keeps swallowing his false teeth listening to those future politicos who "speak for" the revolting students. You see, English literature degrees are not essential to the future of the nation. There is no God-given right for 18 year olds to spend three years getting pissed at taxpayer expense. The Browne recommendations on university funding and student loans are fair to everyone - both taxpayers and students (see this blog). And the thought of these future Jack Straws ruling over us for the next 40 years makes Tyler gag.

PPS Talking of English Lit degrees, Mr and Mrs T saw Rory Kinnear's Hamlet last night. Stunning - possibly the best live Hamlet Tyler has ever seen. Fresh interpretation, strong performances all round. Mrs T thought they'd slightly overdone the modern instances, but Tyler was... well.. stunned. Highly recommended.

Monday, December 06, 2010

How Many Million Unemployables?

Tyler has just attended a rather depressing event hosted by a normally rather upbeat think tank. It was a seminar on a question we've mulled many times - Where will all the new jobs come from?

The correct answer of course is that nobody knows.

Nobody knows because nobody ever knows ahead of time where the new jobs will come from. And as we've blogged before, the best thing government can do to assist is to cut taxes, cut regulation, cut working age welfare and the minimum wage, break up public sector monopolies, decentralise, and cap mass immigration.

And that's pretty well all we can say. Other than reminding people that in the three decades following the invigorating pro-market reforms of St Maggs, our "Sick Man Of Europe" economy managed to throw off its bedclothes and create 6 million new jobs - and that net of 4 million fewer jobs in manufacturing (see this blog).

To be fair, none of today's panel members disagreed with the St Maggs' prescription for private sector jobs growth (well, OK, a couple of panelists weren't keen on welfare cuts). But that's mainly because her prescription wasn't really mentioned at all.

Instead, there was much talk of difficulties with people whose "labour market characteristics" make them unappealing to potential employers.

Labour market characteristics?

Yes, that's things you will know better as motivation, work ethic, and previous employment record. Labour market characteristics turns out to be a euphemism for unemployable. And according to one of the panelists, such characteristics now cripple large swathes of the working age population in the old high unemployment blackspots we've blogged so often.

So how many people are affected? Just how many million unemployables have we now got? We've taken a quick look.

Overall, Britain has 40 million people aged between 16 and 64 (the age band the ONS counts as working age adults). Of those, 11.7 million are not in employment. So that's roughly 70% of the working age population working, and 30% not working.

Fortunately, not all of those 30% are people suffering from labour market characteristics. A big chunk of the younger ones are still in full-time education, and hopefully will find employment in due course. And a big chunk of the older ones either have working partners supporting them, or they're plutocrats who don't need to work.

Stripping out those groups, the hardcore unemployables are among the 5 million people of working age who are entirely dependent on welfare handouts - about 12% of the working age population.

So how many of those 5 million are unemployable?

In truth we don't know. But up until 2008 our economy had experienced the longest period of boom since records began. Between the beginning of 1997 and mid-2008, 2.8 million new jobs were created (net). It's surely reasonable to think that anyone who really wanted a job should have been able to get one.

Indeed, so keen were UK employers to fill those jobs that they actually imported new workers from overseas. Foreign workers flooded in, and as things stand today, 86% of the new jobs created since 1997 are filled by workers born overseas. 86%!

Even at the peak of the boom, we still had 4.3 million working age people dependent on welfare - over 10% of our working age population.

4.3 million apparently unemployable people.


Both for us and for them.

Saturday, December 04, 2010

Who Has Our Children?

The Major's very bad dream

Following yesterday's blog on the problem of bad parents, we've taken another look at who is actually having Britain's children.

The Major is constantly telling us (eg see here) that the welfare state has produced far too many children at the bottom of the heap. He reckons that by paying the poor and feckless to have children we've given ourselves a monstrous problem. Generation upon generation of feckless no-hopers, reproducing like Fibonacci's rabbits, and threatening to undermine a billion years of Darwinian progress.

And while the Major does tend to put things somewhat bluntly, round our way that is a very widely shared view.

The trouble is - as we saw here - actual facts are very thin on the ground.

But we've now taken a closer look at the latest Office for National Statistics data on income distribution across households of different types (see here). And we've extracted the number of children in households according to their income level.

Across the whole country there are 12.9 million dependent children spread across 19.1m non-retired households, an average of 0.67 children per household. But when you look at the distribution of children across each household income level, you find that households in the bottom 20% of incomes have an average of 1.03 children, while those in the top 20% have an average of 0.34.

What that means is that the poorest 20% of (non-retired) households have over 30% of Britain's children. Whereas the richest 20% only have 10% of the children. That is a pretty striking contrast - our economically least successful households have nearly one-third of our children.

Here's the complete picture (note - 20% income bands are known as quintiles):

And to put some more flesh on this, the gross income of the bottom 20% of households before taking account of welfare benefits averages just £7600 pa. Cash welfare benefits add a further £6300 pa.

So what should we make of this? Is the Major right?

Well, it's clearly the case that the poor have considerably more children in their households than the rich. Yes, some of that is because the rich tend to be a bit older, and their kids may have flown the nest. But even if we restrict the comparison just to households with children, those at the bottom have an average of 2 children, whereas those at the top top have just 1.5.

And it's also true that welfare constitutes a big chunk of household income for the poor - getting on for half their average gross income.

But does that mean it's welfare that's delivered all those poor kids?

In an age of readily available contraception where child labour has long since been abolished, simple economics suggests that the poor should have fewer children than those with higher incomes. That's surely straightforward.

And it's also straightforward that paying welfare based on a household's number of children, must increase the attraction of having children.

But does that prove the Major's right?

What if the poor comprise a whole bunch of people who are incapable of thinking and behaving according to economic rationality? It must be said none of us are always great at doing that.

What if we cut child welfare payments only to find ourselves with just as many poor kids, only now they're starving?

Well, it could happen - we can never answer these questions ahead of time, and in the abstract anything is possible.

But Tyler has seen enough to know there's a serious problem with our current welfare system. Nobody wants children starving in gutters, but it can't make sense to subsidise the 20% of our poorest households to produce 30% of our children.

Friday, December 03, 2010

First Choose Your Parents

As regular readers will know, BOM has always had the highest regard for Frank "think the unthinkable" Field. So we were very pleased when Cam appointed him Poverty Czar with a brief to take a good hard look at what we can actually do about it. In particular, what can be done about child poverty?

Today we got his report, and it contains a giant helping of what the Major calls good old fashion common sense.

To begin with, Field wallops Labour's obsession with its meaningless child poverty target - ie the aim to ensure by 2020 that no child lives in a household below an arbitrary line drawn at 60% of median income. Field says:
"The anti-poverty agenda is driven along a single track of hunting down families who live below this line and then marking up a success as a family is moved across the line, no matter how marginal is the advance in their income. It does little to concentrate on those children who endure persistent poverty. Worse still, this approach has prevented a much more comprehensive strategy emerging on how best, in the longer run, to counter child poverty in a way that prevents poor children from becoming poor adults."
Spot on Frank. We have long believed that dishing out yet more cash to poor families is missing the point. In general, even the lowest incomes today have moved far above what most of us mean by poverty (eg see this blog). Here's what happened to incomes on that 60% benchmark over the last half century (in real terms, adjusted for inflation):

As we can see, income on Labour's definition of the Poverty Line more than doubled from around £6k pa to nearly £13k. That is not a meaningful definition of poverty.

What's more, taxpayers can no longer afford to fund poverty relief on that scale. As Field says:
"To meet a target of cutting child poverty to 5 per cent of all children by 2020 a further £37 billion per annum in tax credit transfers is required... an unthinkable sum in current conditions. Can anyone seriously maintain that sums of these sizes will be forthcoming over the decade, to 2020?"
Much more usefully, Field focuses on the real problem - what on earth can we do to prevent poor children from becoming poor adults?

And here, he spells out something we all know, but which PC squeamishness has for too long excluded from the public debate on child poverty:
"Even if the money were available to lift all children out of income poverty in the short term, it is far from clear that this move would in itself close the achievement gap.

... there is much more beyond just improving short-term family incomes in determining the life chances of poor children. A healthy pregnancy, positive but authoritative parenting, high quality childcare, a positive approach to learning at home and an improvement in parents’ qualifications together, can transform children’s life chances, and trump class background and parental income.

A child growing up in a family with these attributes, even if the family is poor, has every chance of succeeding in life."
That resonates so strongly with Tyler. As he's blogged many times, he had the great good fortune to grow up in a family with little money but absolutely outstanding parents. And when it comes to a choice between those two, there is no choice - first, choose your parents.

Fine. Common sense.

Except unfortunately, there just aren't enough good parents to go round. And there are especially not enough to go round down in the depths of welfare dependency.

So what to do? How do we get those problem parents we've blogged so often take their responsibilities seriously? And even if we manage that, how do we get them capable of discharging those responsibilities?

Frank's solution is to expand the support services available to help. He wants organised training for parents. He wants to refocus the floundering Sure Start programme on helping the weakest parents who really need the help. He wants pre-school foundation programmes to have resource priority ahead of more spending on Child Tax Credits. He wants to get charities and voluntary groups more involved. And he wants to formalise the responsibilities of local councils and schools for lifting the attainment levels of disadvantaged kids.

Now all of that sounds quite sensible - certainly the way Frank tells it. The whole thing is geared to breaking the dire intergenerational spiral of dependency and decline visited on us by the welfare state. And it has to be better than Labour's bone-headed pursuit of arbitrary income targets.

But what we don't want is to exchange Labour's socialist poverty disaster, with a different socialist poverty disaster.

Because although this report points in the right general direction - ie less reliance on ever-expanding welfare payments and more reliance on the poor taking back responsibility for their own lives - Frank is still a socialist. Deep down he may still believe that government can find technical solutions - ways of applying the very best brains to crack even the toughest problems.

And Tyler found himself shifting uncomfortably as he read the following (quoted approvingly by Frank from a couple of eminent education Profs):
"We seem to know as much in principle about how parental involvement and its impact on pupil achievement as Newton knew about the physics of motion in the seventeenth century. What we seem to lack is the ‘engineering science’ that helps us put our knowledge into practice. By 1650 Newton knew in theory how to put a missile on the moon. It took more than 300 years to learn how to do this in practice. The scientists who did this used Newton’s physics with modern engineering knowledge. We must not wait three hundred years to promote stellar advances in pupils’ achievement. We need urgently to learn how to apply the knowledge we already have in the field."
No, no, no.

You see, the problem with that is that physics is physics. Whereas pupil achievement is all about horribly messy human beings. Human beings who can't even manage their own behaviour, let alone manage the behaviour of other human beings.

Let's hope Frank doesn't really believe we can somehow engineer our way out of this.

Thursday, December 02, 2010

Who's To Blame?

You filthy English - we have brought you here to humiliate you

Here's the list of suspects identified by callers so far:

Sepp Blatter
Deceitful FIFA bureaucrats on the take
Russian gangsters
Birmingham and Villa supporters

Tyler has already made his views clear, so he ought to be rejoicing.

Yet somehow he's not. It's one thing to believe we should never offer to host any of these tax-funded jamborees, but it's quite another to accept national humiliation at the hands of a bunch of jumped up council officials from countries that had never even heard of football until 30 years ago.

Why did it happen? Nobody seems to know, but the Major has come up with the following interesting fact. Of the 24 members of FIFA's Executive Committee - the guys who actually made the decision - no fewer than 15 represent countries which are either ex-colonies, or with which we have had at least one war in the last 200 years.


Everybody hates us and it turns out we do care.

Update - Some FIFA financials

I couldn't resist looking at FIFA's finances. In 2009 they had revenue of about $1bn. Of that, the vast bulk - $0.9bn - came from the World Cup (which only happens once every four years but the revenues are spread out across all years).

FIFA's world Cup revenues come from broadcast rights and marketing (mainly corporate sponsorship). World Cup ticket revenues go to the host organiser (which would be the FA here).

The biggest chunk is broadcasting rights which seem to have totalled well over $2bn for the last WC in South Africa. But the interesting thing is that the sources of this broadcasting revenue are highly concentrated. Well over 50% comes from Europe. Adding in Asia takes the total up to 80%. Yet despite this, Europe and Asia combined only get 50% of votes on the FIFA Executive Committee. And my bet is that if we could see a revenue breakdown within Europe and Asia, we'd find some even more startling concentrations.

The obvious question is why don't the footballing authorities in the major revenue generating countries get together and do a complete Premier League style breakaway from the sleazy dysfunctional FIFA? Organise their own World Cup, to be rotated between them. Of course, we'd expect the big Latin American countries to be included as well, but on my count, there'd be no more than ten in the core group. Which would give each of them the tournament once every 40 years.

Naturally every country in the world would be invited to compete, just as now. But the competition would always be held in one of the big footballing nations.

Oh, and the tournament would need to be entirely self-financing - no more taxpayer subs.

Taxpayer Funded Environmentalism

The TPA has a new report out today on taxpayer funded environmentalism. That's the outrageous arrangement whereby we pay the hippies to campaign for more restrictions on our freedom to live in the 21st century. The TPA's Emma Boon explains it all in the vid.

Key points:

•A total of £10.1 million was given to a range of environmental groups by the UK Government and the European Union in 2009-10.

•The total includes £2.5 million from various UK local councils, departments and quangos.

•It also includes £7.6 million in European Commission grants to environmental NGOs.

•The Foreign and Commonwealth Office made the largest UK payment in 2009-10 of £342,929 to WWF UK.

•Hackney council made the largest payment in 2009-10 from a UK council at £141,246 to Global Action Plan.

Of course, nobody can object to the hippies' right to run their bonkers campaigns (well, nobody except the Major, that is). But we should all object to being forced to pay £10m pa of our friggin' money to fund those campaigns.
PS Humble apologies for getting the dates wrong yesterday on Pitt the younger. I reported that the Bank Governor had made highly disparaging Mervyn King style remarks about Pitt in 1780. However, as was pointed out by the inestimable William Norton in comments, Pitt "wasn't elected to the Commons until January 1781, and didn't become Chancellor until July 1782." Quite right Mr N - a correction has been made. It just goes to show you shouldn't believe everything you read in Google. Or in leaked US ambassadors' emails come to that.

Wednesday, December 01, 2010

That's Not Fair!

You said it, Bro
The Treasury has just published the Hutton Report on Fair Pay in the Public Sector.

As BOM readers will recall, back in the summer Mr Cam commissioned Will Hutton "... to investigate pay scales across the public sector, and make recommendations on how to ensure that no public sector manager can earn more than twenty times the lowest paid person in the organisation."

In other words, Hutton's job was to address the scandal of fatcat pay in the public sector - a scandal that was first exposed in a series of reports from the TaxPayers' Alliance (eg see here). And to work out how to implement a 20-to-1 cap on top public sector remuneration.

But predictably enough, left-winger Hutton has found it impossible to stick to that very clear remit. Instead, much of his 128 page report is a polemic on top pay in the private sector, driven by 1970s-style politics of envy.

He kicks off by charting how the pay of the top 1% has pulled away from the average:

No matter that this relates to just 1% of the population, and most them are being paid by the market not taxpayers, for Hutton it's a serious problem:
"Substantial and growing pay inequality poses a serious challenge to society and Government. Do high earners deserve such large rewards? And is it fair that a wide and growing gap should exist between the pay of those at the very top of the income scale and the rest of the population?"
Fair? This is the market, Will. The thing that in just two millenia has lifted us from mud huts to plasma tellies. Sounds fair to us.

He goes on:
"...chief executive pay for Britain‟s leading listed companies rose by around eight times between 1986 and 2010... It is increasingly doubtful whether this has been proportional to increases in performance, or even reflects the real demand and supply for executive services. Chief executives have become treated as business super-stars drawn from an ever narrower potential pool... benchmarking between firms locks them into a kind of arms race... Any one company that tries to stand out against the trend risks losing its top people and inviting markets and investors to view it as second rate. Little... seems capable of creating more rationality or slowing the pace of increase... There is widespread scepticism whether this degree of increase in executive pay is fair."
Fair - there it is again. Look Will, we don't care what private sector chief execs get paid - especially when the figures relate just to the 100 FTSE100 CEOs. We only care about what they do for us as customers, whether they deliver good returns to us as shareholders, and whether they stay within the law. Everything else is so much envious wibble.

Now public sector pay, that's a different matter entirely. Because we have to fund that through compulsory taxation. We're very interested indeed in what those guys get paid because it comes straight out of our wallets. We can't choose to take our custom elsewhere, and we can't sell our shares in their companies.

So what does he say on top public sector pay - ie the job he was asked to do.

First, he tells us that there are now no fewer than 20,000 public sector employees in the top 1% of income earners (earning over £117,523 pa). Well, actually he doesn't tell us that - he merely rehashes some numbers given on a recent Panorama programme.

Anyway, most of those 20,000 turn out to be doctors employed by the NHS (ah, those brilliant Simple Shopper pay deals). But there are also 4,000 managers distributed across the various bits of the public sector as follows:

These findings are broadly consistent with what the TPA has previously published in its Public Sector Rich Lists (eg here) - if anything, Hutton's overall fatcat number is a shade higher than the TPA's.

In terms of pay growth under Labour, Hutton confirms that top public sector managers generally did outstandingly well. For example, between 2000 and 2009 chief execs of NHS hospital trusts got an average 50% increase in real terms:

The bottom line is that Hutton pretty well agrees with everything the TPA has been saying on public sector fatcats. So naturally he offers his thanks to the TPA for their outstanding service to taxpayers.

Except... just a cotton pickin' minute... he doesn't offer his thanks.. Actually he suggests the TPA has been misleading the public:
" Top pay in the public sector has come under greater media scrutiny in recent years... But public understanding remains divorced from the data set out in this[report]...

Limited understanding feeds through into the wider debate. Campaign groups such as the Taxpayer' Alliance argue that the public sector must get value for money – which they define as paying the lowest amount to secure a suitable candidate – but that it does not currently achieve this...

A media narrative which over-concentrates on public sector 'fat cats' while not offering the same proper scepticism and focus over what is happening at the top of the private sector does not lead to understanding, and can undermine the desirable move to greater transparency over pay."
Allow me to translate:

The TPA has been far too successful in focusing the public's attention on the cavalier way in which the public sector wastes their hard-earned cash. The spotlight on fatcat pay, and the number of bureaucrats who get paid more than the Prime Minister, has resonated with taxpayers in a way that has caused huge discomfort for the promotors of big government. People like Hutton need to hit back, and they aim to throw taxpayers off the scent by suggesting the real problem is excessive pay in the private sector. Welcome back 1970s incomes policy and the politics of envy.

And what about the job Mr Cam actually asked him to do? That 20-to-1 pay ratio cap for the public sector?

Well, Hutton likes the idea. He likes it for a number of reasons, but in particular:
"A pay ratio is an easily understandable reference point, and could give the public confidence that public sector pay is being kept in check. Defined appropriately, this can have more flexibility than merely using the Prime Minister's salary as a benchmark."
In other words, by accepting this ratio cap, public bosses could maybe get taxpayers off their back, while simultaneously getting round the current de facto pay cap of the PM's salary. The latter clearly has to go, since post Cam's self-imposed cut, it's down to a measily £142,500 pa.

Are you ready to be fooled?

PS So should Mervyn King be fired as Bank Governor? The preposterous lefty Blanchflower reckons so, because of King's supposed political bias. But in truth, there is no bias. Like most of his predecessors, King almost certainly reckons everyone down the Westminster end of town is rubbish. The WikiLeaks "revelation" that he thought Cam and George inexperienced and too political is what all previous Governors have thought about all inexperienced politicos ever since 1694 - you should have heard what Governor William Ewer said about Pitt the Younger in 1782. Cam would be mad to sack King - we'd be straight back to the final bunker days of Mad Murdo McMad.

Tuesday, November 30, 2010

World Cup Debacle - Win Win Win

Is this what we pay our taxes for?

Let's agree one point straight away - bringing the 2018 World Cup to England would cost taxpayers a packet.

How much?

Frankly we have no idea. Just like with 2012 Olympics, nobody seems to have worked out anything as mundane as precise costings. All we can glean is:
"The cost of staging the tournament between now and 2018 is being put at just under £1 billion. The Government has already signed guarantees worth £300 million while the 12 host cities have guaranteed funding of £400 million. The bid itself has cost £15.5 million to finance. Manchester is one of the host cities with two of the chosen stadia. A recent report by its city council suggested the cost to local taxpayers would be up to £30 million."
£1bn, huh? And does anyone believe that?

Quite. We can all remember how the projected cost of the Olympics quadrupled - yes, quadrupled - once the bid had been won. All of it to be extracted from us taxpayers.

Yes, the England bid has just been rated as being likely to generate more revenue that many of the competing bids, but what we need to ask is who gets those revenues? Sure, Fifa will take a big slug, tax free, so they'll be well pleased. But how much will we schmuck British taxpayers get? I think we know the answer.

Tyler has no problem with us hosting the World Cup (he will tune out the inevitable national humiliation). But he does have a huge problem with being forced to pay for it.

Which is why he is absolutely delighted with the late intervention of our public service broadcaster. Panorama's allegations of Fifa executive committee members taking bribes has pissed off Fifa, and almost certainly stymied our bid.


In fact it's win, win, win.

First, we win because we save ourselves a pile of cash (not to mention avoiding having our noses rubbed in a pile of national humiliation right here on our own doorstep).

Second, we win because we remind everyone of the corruption endemic in all of these big international bureaucracies (eg the UN). Putting big western money into the hands of people with third world fiduciary standards is asking for trouble.

And third, we win because everyone will blame the BBC. Our self-styled public service broadcaster has just denied the public the service of the greatest show on earth.


Monday, November 29, 2010

Facing Up To The Doomsday Machine

So what have we learned from today's autumn fiscal report from the Office for Budget Responsibility?

First, the OBR under Chote still thinks George is on track to deliver what he promised in June:
"Our best judgement is that the Government has a better than 50 per cent chance of meeting its mandate for a cyclically-adjusted current budget balance in 2015–16 and of achieving its supplementary target of seeing public sector net debt fall between 2014–15 and 2015–16."
Spot that "better than a 50% chance"? To listen to Will Hutton and the BBC's other "neutral commentators" you'd think the OBR had said "less than 50% chance". The fact is that despite everything previous Chancellors have promised, there are never any certainties in fiscal forecasting. "Better than 50%" really does mean George is on track.

Indeed, on the OBR's forecasts, things could well turn out better, because they reckon the downside risks to growth - the ones stressed by the BBC - are evenly balanced by the upside "risks". That is, growth could turn out higher than the central forecast, boosting tax revenues and cutting welfare payments. The OBR thinks there's a 1-in-3 chance that the government will actually be in surplus (ie repaying debt) by 2015-16:

As for the OBR report itself, it's in a different league from anything HM Treasury has previously published. It provides much more detail on the underlying assumptions, and for the first time gives some chapter and verse on BOM's old friend the Doomsday Machine (aka the risk that debt interest payments grow faster than the government's ability to finance them out of current revenues).

On that, the headline message - trumpeted by everyone from the Chancellor down - is encouraging. It is that debt interest payments are now expected to be lower than forecast in June - £18.6bn lower over the forecast period as a whole (2010-11 to 2015-16). So that's definitely good.

But we shouldn't get carried away. Debt interest still increases from £43bn this year to £63bn by 2015-16. Moreover, the OBR lifts the lid on the underlying drivers of its debt interest projection. And there we discover that what's driving the reduction in costs is not some big cut in borrowing, but a cut in the assumed interest rate the government will have to pay.

Here's the OBR's chart comparing June and November's assumptions on the average interest rate HMG will have to pay on the majority of its new bond issues (so-called conventional gilts):

As we can see, November's assumed rate is lower throughout the forecast period (by an average 0.24%). And it's the assumed lower rates that drive the bulk of the saving.

Now those lower rates reflect what has happened in the gilt market since June, so fair enough. Especially since George can argue that it's his "tough choices" that have given the market confidence to cut his borrowing rate.

But as we all know, rates that go down can also go up - especially if the market gets the jitters on inflation. So what happens then?

Again, the OBR report tells us. It includes a handy ready reckoner (Table 4.20) that shows what happens if the interest rate on gilts increases by 1% from what has been assumed. An it's not pretty - a 1% increase throughout would add £15bn to debt interest costs (and although we can't quite tell from the OBR table, with higher gilt yields there would almost certainly be other associated increases, reflecting for example, higher interest rates on National Savings).

One of the most interesting sections is on the long-term fiscal outlook, where an unchecked Doomsday Machine at full revs can do some real damage.

The key long-term issue is one we've blogged many times - too many old people, and not enough workers to support and look after them. The healthcare and pension costs of the old people increases inexorably, the tax revenues generated by the young fail to keep pace, and government borrowing goes through the roof.

The OBR has cranked some numbers looking out to mid-century showing how this could impact public sector debt. It reckons that even if all future governments maintain the same degree of fiscal restraint as George (a highly unlikely proposition given past experience), the cost of all those old people will push debt up to 100% of GDP by 2050:

But concerning though it is, that projection almost certainly understates the problem. Not only does it exclude all those off-balance sheet Enron debts, but others have projected much higher debts by mid-century (eg the Bank for International Settlements recently projected UK official public debt at 550% of GDP by 2050 - see this blog).

This is a serious problem - and Tyler speaks as one who will be part of that problem. Something will have to be done, and none of the options are going to be popular.

The OBR says it is taking a much closer look and will be reporting back next year. We very much hope that they give it to us straight - much straighter than the "fiscal sustainability" reports the Treasury have issued in the past, which have basically made out everything's fine.

Minds need to be concentrated on Doomsday.

Sunday, November 28, 2010

All A Question Of Breeding

Not everyone can have the Major's breeding

No sooner had the Tylers returned from the frozen wastes of Swindon, the Major came steaming round. He simply cannot believe the way Lord Flight was slapped down over his "perfectly sensible remarks re breeding".

"I mean everyone knows the socialists have landed us with a huge problem. Everyone knows it's insane to reward feckless teenage girls for having kids they can't afford to support, and won't bring up properly. Think of all the problems we're storing up - well, no, think of all the problems we already have! Hideous costs, disrupted classrooms, vandalism, drugs, muggings, obesity, yet more pregnant teenagers, prisons already full up... gah!  It is mad, literally mad, to encourage breeding among the dregs of society. We should be working to prevent it - by all means possible!"

His reddened face had contorted alarmingly. "Down at the bottom, having kids has become a career option! Yet when anyone talks about it in public, they got taken out and shot!" A finger jabbed towards Tyler. "And that's because of people like you! Too squeamish to face the facts! Too namby-pamby to speak up. You make me sick!"

"Well, thank you, Major," Tyler ventured. "But according to the BBC, nobody goes out and has a child just so she can claim child support - it's hardly a king's ransom, you know. I'll bet you wouldn't get pregnant for that kind of money."

Spluttering, the Major charged on. "I want you to look out the numbers. I'll bet the lower orders are breeding like rabbits. Hopeless moronic girls dropping no-hope kids left right and centre. All paid for by us! US!!"


What we need here are a few facts.

And what we need to know before anything is whether the birth rate is higher among benefit dependents than among those who pay their own way?

Luckily the Office for National Statistics publishes an annual review of births in England and Wales, and the most recent one is entitled Who is having babies? Which sounds like it ought to answer our question straight away.

Except that it doesn't.

Yes, it tells us there were 708,711 babies born in 2008. And that over half were born to mothers aged between 25 and 35, with a quarter being born to younger women.

It also tells us that of those births registered jointly by two parents (either married or unmarried), the vast majority were to fathers who claimed to have some recognised occupation (ie something other than lying in bed all day drinking cut-price lager and procreating):

But those stats don't tell us what we need to know.

For one thing they only apply to births registered to couples. 43,000 births (6% of the total) were to single women not living with a partner. And the ONS report gives us no information on their socio-economic classification.

Moreover, there's another c40,000 registered to fathers who are "unclassified", and we can all imagine what sort of fathers they might be.

And then again, of the births registered jointly to couples, a stonking 70,000 of them were registered to couples who weren't actually living together at the time of registration. Now, does that sound like a viable benefit-free home background?

Unfortunately, that's all the info the ONS summary gives us.

In fact, that's pretty well all the hard info we've been able to uncover at the national level.

But there are some local stats which cast a very interesting light on how baby production incentives work in areas where alternative employment opportunities are limited. And they are the stats that show for each local authority area the percentage of births that are to unmarried mothers.

Across the country as a whole, that percentage is now 45% - ie nearly half of all births are now to unmarried mothers. But in some areas of the country that percentage is much higher.

In 2009, the highest was in Blackpool, where no fewer than 69% of babies were born outside marriage. In Blackpool to be born to married parents puts you in a minority of just 31% of your peers.

Joint second highest were Easington and Hartlepool on 68%. And here's the whole top 10 (the national average is 45% remember):

Spot the pattern?

Take a moment to study the list.

Yes, that's correct - all of these areas are in economic black spots up North and in South Wales. All have relatively high unemployment rates, relatively low wages, and rather limited alternative career options for girls at the bottom. All have relatively high welfare dependency.

Compare and contrast with the areas where the percentage of births outside marriage are lowest (ie where the vast majority of babies are born to married couples).

The very lowest, on just 27%, is the Royal Borough itself - leafy Windsor and Maidenhead. Then comes Wokingham (29%), Slough (32%), Surrey (32%), and the somewhat inappropriately named Rutland (33%).

And what have all those areas got in common?

Yes, right again - relatively low unemployment, relatively high wages, and relatively low welfare dependency. In other words, a career having kids has to be relatively less attractive.

OK. OK. Not very scientific.

True. That's because the government does not publish the data we really need to see, so we're driven to these alternatives.

But it does make you think.

Further investigation required. Preferably by the government.

PS If you haven't already done so you should read this excellent article by Dennis Sewell on eugenics and the welfare state. It recounts how the socialist founders of the welfare state believed it would need to be accompanied by the elimination of anti-social elements. As the sainted William Beveridge put it: ‘those men who through general defects are unable to fill such a whole place in industry, are to be recognised as “unemployable”. They must become the acknowledged dependents of the State... but with complete and permanent loss of all citizen rights — including not only the franchise but civil freedom and fatherhood.’ Pity he never got the chance to share his bracing ideas with the Major.