Saturday, July 31, 2010

Rule By Failed Rock Star

Al finally makes it into the Merseybeats

BOM's old friend Rockin' Al Johnson has finally made the big-time. He's got his own rock show on the BBC. Even better, you're paying for it.

OK, it's called Alan Johnson: Failed Rock Star, but at least he's up there in the limelight, grooving alongside such all-time greats as the Merseybeats (pic). And as he cheerfully admits, if only he'd made it first time around back in the swingin' 60s, he need never have settled for politics to get the attention he craves.

And he's not the only one - from Bliar down, stacks of NuLab's ministers went into politics only after they'd bombed as rock gods. Even now, given half a chance to join the Merseybeats, most would drop their current has-been minister jobs like a shot.

Tyler was reminded of this on Wednesday afternoon strolling along a sunlit side-street in Westminster. Coming the other way were the Blues Brothers - stylish sunglasses, linen suits, hand clappin, foot stompin, funky-butt ... podgy. Obviously they were jive talkin', but as they passed, Tyler managed to catch a word. It began with eff and ended in ucking. At which point Tyler recognised disgraced Brown spinner Charles Whelan and disgraced Brown enforcer Nick Brown, making their way back from some lunchtime gig in a karaoke bar.

The thing is, rule by failed rock star turned out to be a great gig for those doing the ruling, but not quite so great for rest of us. If only Al had made it in the 60s, he need never have ended up floundering around as Home Secretary, or "at the helm" of the NHS or our social security system.

The man now at the helm of our nightmarish £200bn pa social security system is most assuredly not the rock star type. The one time he tried his hand in showbiz, his performance was devastatingly mocked by one critic as "the Walmington-on-Sea amateur dramatic society does Henry V". There's no way he'll ever be invited to join the Merseys.

Yet, as we saw once again yesterday, this self-styled Quiet Man of British politics is actually the one who looks like finally gripping the crippling inconsistencies and contradictions at the heart of our welfare system.

The most difficult question there, of course, is the one we blogged several times last week (eg here and here), and the one we investigated for the TPA's new paper Welfare reform in tough fiscal times. How do we make sure work pays for the near 6m working-age poor who currently depend entirely on welfare? And even more difficult, how do we do it now that the failed rock stars have blown all the bread?

As IDS spelled out once again in yesterday's consulation paper, after 60 years of our gargantuan welfare state, Britain's workless poor face a welfare trap of life-mangling proportions.

The paper contains the following chart, showing how the trap works for a couple with a single earner on the Minimum Wage, and two children. The family can certainly increase its net income (vertical axis) as the earner works more hours (horizontal axis), but only by a horribly small amount (ignore all the various bands in the chart - they simply show how the various benefits taper away as the family's own earnings increase: focus on the top line which shows how net income increases as hours of work increase):

This means "that someone at the National Minimum Wage would be less than £7 per week better off if they worked [up to]16 extra hours and earned an extra £92 (an effective wage rate of 44p per hour)". It also means that he faces "a Marginal Deduction Rate of 95.5 per cent on earnings between £126 and £218".

As the report puts it, "a system that produces this result cannot be right".

So what's to be done? The report offers three possible approaches:
  1. A Universal Credit - all existing benefits abolished and combined into one simple to understand and administer universal benefit.
  2. A Single Unified Taper - retains the existing range of individual benefits but "withdrawal would be through a taper that would be applied to their overall benefit eligibility, rather than the individual benefits as is currently the case".
  3. Single benefit/negative income tax model - as recommended by the TPA (marking the very first time ever a TPA policy proposal has been explicitly picked up in an official government publication - hurrah!)
We can only welcome IDS's boldness and give him every support.

True, his paper does not mention the other key aspect of the TPA proposal - ie the need to fund these reforms by lowering the poverty line - but we can work on that.

The main thing is that after all the opportunities wasted by those wannabe rock stars, we finally have a government that has the guts not only to think the unthinkable, but also to do it.

We hope.

PS So who is ultimately responsible for the fact that we ended up being ruled by fourth rate rock stars? Fundamentally you've got to blame these guys:

Their intoxicating combination of teen beat and cocking a snook at authority changed the world for people like Rockin' Al. As he says "everything changed and changed forever at the dawn of civilisation - the arrival of The Beatles... I used to try to model myself on Paul McCartney." No wonder he ended up in Bliar's government.

And while we're on the subject, Mrs T has been scouring the darkest recesses of the Tyler attic (filthy dirty, covered in cobwebs... but she's good with the kids). As we've certainly mentioned before, at about the time J Lennon was asking the Queen Mum to rattle her jewelry on live TV, Mrs T was bunking off school to visit the Fab Four in their Surrey mansions. In those days, it was nothing for 13 year old convent girls of a certain disposition to bunk off, hitch a ride, and knock on George Harrison's front door. And Mrs T has the snaps to prove it. Well, that is, she has the snaps somewhere. But unlike the granny who's flogging hers next week, Mrs T hasn't found a single one. Bah!

Thursday, July 29, 2010

The Natives Are Not Revolting

Tax is still the key to localism

Tyler recently attended another Westminster seminar on localism. You know, that's everyone's great idea for extracting more value from public services by running them locally rather than from Whitehall.

Like most such seminars, it was attended by a mix of civil servants, quangocrats, local government people, think tankers, private contractors, consultants, and various hangers-on like Tyler. In other words, it overwhelmingly comprised people who in one way or another are paid from the public purse (not, it should be stressed, Tyler).

All - well, pretty well all - were agreed that we must have more localism. After all, we currently have the most centralised system of government in any of the major developed economies, and that can't be right (see many previous posts eg here). Localism rocks.

But alas, the attendees could see problems. Very serious problems.

First, there's the issue of the locals themselves. I mean, have you ever actually met the locals? My dear! How can you possibly have localism when the locals are a bunch of fascists and/or idiots? How can they be trusted to do The Right Thing - ie the thing the people around the seminar table want done? There will clearly need be national guidelines and service standards, and locals certainly couldn't be trusted with say, setting their own welfare standards. Why, they might not take proper account of the European Decency Threshold. They might even revert to workhouses!

Second, there's the issue of capacity. Even if they were given more power over things like welfare, local councils just don't have the capacity to take on the job. Frankly, sweeping the streets and emptying the bins already stretches their meagre abilities to breaking point, and we need hardly dwell on the Baby P area.

Third, there's the closely related issue of infantalisation. Local councils themselves are fully aware of their own lack of capacity, and frankly they like it that way. They simply don't have the confidence and maturity to take on more challenging tasks. Mummy's apron strings offer a far safer and easier life.

Fourth, we could end up with a postcode lottery. A postcode lottery! Some councils might decide to provide different services to others, and then where would we be? Although it must be said that argument did take a bit of a hit when one speaker pointed out we already have a postcode lottery in much service provision - one often caused by administrative accident rather than deliberate policy.

Fifth, it would be expensive. No economies of scale, you see. All those little councils running their own separate little services, rather than relying on the super-efficient national services we currently enjoy. Er, yes... that argument also took a bit of a hit in subsequent discussion.

Sixth, few people out there among the locals actually seems to want it. The natives are not revolting. They are not manning the barricades demanding to be free. And stuffing localism down the unwilling throats of the apathetic locals sounds like a surefire recipe for disaster.

And you know, we've got some sympathy with many of those points - especially the last one.

We have long been strongly in favour of more localism, but it must be admitted that most people round our way don't actually want the council to have more power. True, the rubbish collection seems to work tolerably well, but that's long since been contracted out. Beyond that, people generally have very little confidence in the ability and judgement of the local council. There is no clamour whatsoever to give it more power, and precious little interest in who gets elected as councillors.

And Tyler himself has a pretty hypocritical attitude on this. He may be a big supporter of localism, but when he's actually been approached to stand for the council (there's a local recruitment drive going on right now), he's declined. He believes it would be a pretty thankless task, with no end of brickbats but precious little actual power. Responsibility without power - the classic meat in the sandwich between Whitehall and the angry citizens.

You see, at root, what we have here are our old friends Mr Chicken and Mr Egg.

Councils have lost confidence and capacity because over the last half century they've been gradually stripped of their traditional power and responsibility. They've come to rely on Whitehall for the vast bulk of their cash, and they therefore have to take instructions direct from Whitehall, rather than deciding things for themselves. Is it any wonder it's difficult to persuade people to stand for the council?

So now we face the prospect of localising control into the hands of our weak councils - quite a scary prospect. Yet if we don't do that, we will never start to rebuild all those capacities we've lost. We won't get the chicken unless we take a chance on the egg.

And what is the key step we need to take? As regular readers will know, we have long argued for fiscal decentralisation. Indeed we've even written research notes on the subject (eg see here).

What it means is that we need to go much further than simply have Whitehall hand over an even bigger pot of cash to our councils. What it means more than anything is making councils responsible for raising a much larger slice of their own cash for themselves from local taxpayers. We need to reverse the pattern of finance at least back to what it was before the terrible Wislon started the destruction of our local authorities in the 60s:

If once again, local councils were responsible for raising half their funding direct from local taxpayers, that would concentrate local minds wonderfully. Suddenly it would matter a whole lot who was running the town hall. People like Tyler would have a real incentive to get involved, and what's more, election to the council would never be a shoo-in.

If we are genuinely serious about localism, step one is the decentralise the tax system. Taxes always have been and always will be the key to local engagement.

Wednesday, July 28, 2010

When Can We Stop Digging?

We are leading the world

As you will know, the man now in charge of Britain's energy supplies is one of our most notorious eco-hippies. But since we can't improve on Christopher Booker's brilliant Huhne demolition we needn't go on about that.

What we'd really like to know is when can we stop digging the huge black eco hole our grandstanding politicos have dumped us into?

We all surely understand the score by now. Our political class have presented us with a cataclysmic energy gap in the shape of closing coal-fired power stations with no practical replacement available. Common sense says we'd better delay the closures as long as technically possible, crack on with the new nukes for the long-term, and build a few Chinese style coal-fired stations for the short-term. Either that, or watch the few remaining bits of British industry leave for places that can still supply power... like China.

Some of us had somehow hoped that the new government would return us to sanity, despite Cam's personal wind turbine. But no such luck. Huhne is quite happy to continue digging just where the last lot left off, boasting yesterday:

"Britain is the first country in the world to set legally binding ‘carbon budgets’, aiming to cut UK emissions by 34% by 2020 and at least 80% by 2050 through investment in energy efficiency and clean energy technologies such as renewables, nuclear and carbon capture and storage."
Look, out here, we don't want to be the first (ie the only) country in the world to dig our own economic grave, thank you very much.

But at least the costs of this madness are now becoming apparent to everyone. Even Huhne's department admits that everyone's domestic fuel bills are set to rack up substantially. Over the next decade, they expect
"The impact of climate change and energy policies on energy prices [will be to increase them by] 18% and 33% on gas and electricity prices respectively for domestic consumers and 24% and 43% respectively, for medium-sized nondomestic consumers."
Which for an average UK household translates into an annual increase of around £300. And for a typical small manufacturing firm will likely be the straw that breaks them.

According to the department of course, it won't be like that. That's because we'll all cut our energy consumption to offset the increase in prices. So we'll all be just as well off, but the planet will be that much greener (reality check - a 25% cut in our total energy consumption would reduce global greenhouse gas emissions by at the very most 0.5%... and that's assuming we don't simply export our remaining CO2 generating industries to China, which is what actually happens in the real world).

So the question is when will our anger at rising energy prices mount sufficiently to force a halt to the digging?

Step one is to make sure everyone understands just what it's costing us all. Step two will doubtless take care of itself when the lights start going out later this decade.

PS Hilarious contrast between the BBC/C4 coverage of the current US defence leak and the Climategate leak. Whereas the leaker/hacker responsible for the Climategate leak was branded a sneaky criminal - or possibly Russian black ops - the leakers of the defence material have been presented as courageous heroes. Yesterday's Newsnight featured Kirstie positively drooling over the Wikileaks man, even asking if he was Jason Bourne.

Monday, July 26, 2010

How We All Ended Up On Welfare

Something must be done, and it was... the trouble is it's since been overdone

Once upon a time, long long ago, welfare was paid to the poor. And only to the poor.

But these days, welfare is paid to pretty well everybody. Even Jonathan Ross and those plutocrats on the Wharf get welfare. It doesn't matter how rich you are, there'll usually be some way of getting your snout into the welfare trough. From Child Benefit, to free bus passes, to the winter fuel allowance, the opportunities are there. If you want some, you can get some.

We've been reminded of this by reaction to last week's TPA report on welfare reform (see below). It's been pointed out that the TPA's proposal to redefine the poverty line - lowering it from 60% of median income to 50% - would remove welfare support from families who, while not poor, would lose a substantial chunk of their current welfare income.

Now as it happens, the Office for National Statistics has recently published its latest annual report on the effect of taxes and benefits on household incomes. It covers 2008-09 and it shows us just how much welfare is received by households at different income levels.

Let's leave pensioner households out of it (as we did in the TPA report), and focus on non-retired households. The ONS figures show that households on around median incomes (gross incomes of £32-35k pa) on average get well over £3,000 pa in cash benefits. A 10% top-up to their own not insubstantial incomes from welfare benefits, including Child Benefit and Brown's various tax credits.

And here's how it looks across the entire income distribution (non-retired households only - excluding pensioner households):

So as we can see, under our current welfare system, even the richest 10% of households, with average gross incomes in excess of £100 grand pa, still get welfare - in their case averaging £1300 pa.

On what possible basis can that make sense?

The alarming and unpalatable truth is that after 60 years of the welfare state, pretty well all of us have ended up on welfare.

It's no way to run a 21st century economy, already burdened with a massive fiscal crisis, and facing a competitive onslaught from the East.

In the famous words of our most famous playboy prince during a previous economic crisis, something must be done.


Much reaction to last week's post on redefining the poverty line. Mainly supportive.

Picking up from the TPA report on welfare reform, we argued that the official definition of the poverty line should be cut from 60% of median income to 50%. We calculate that would save £20-30bn pa in welfare costs currently spent on the able-bodied working age poor, money that could be better spent making work pay (ie reducing the scandalously high effective marginal tax rates faced by the working poor). As far as we can see, that is the only realistic and affordable option for reforming the current iniquitous system that traps so many millions on welfare.

Of course, the left will never buy it, and Labour blogger Hopi Sen spells out why:

"If you’re the Taxpayers’ Alliance, the way to cut the gordian knot of Welfare reform without spending any money seems to be to redfine poverty to a much lower level, reduce support for those a little above that level, and abandon pretty much all support for those on medium-low incomes.
In other words, if you’re near the current definition of poverty, struggling to get by, and find tax credits and child benefit and income support useful- Watch out. They’re coming to get you."
We've posted a full response to Sen on the TPA site, including the fact that he and the left offer no affordable alternative for reforming our current shambolic and dysfunctional system. But there's one point that it's worth amplifying here.

As things stand, the official poverty line is benchmarked off a median income figure that includes existing welfare benefits. And Sen reckons it ought to stay that way.

We reckon that's wrong. The reason is that it's a circular calculation. It means that both median income and the poverty line are artificially inflated by the welfare system itself. The system ends up chasing its own tail towards ever higher costs and an ever worse welfare trap.

This highlights a key difference between us and the left on welfare. Whereas the left see welfare as a tool for compressing income relativities throughout the income range, we believe that for able-bodied adults of working age, welfare payments should, in principle, be confined to a safety net, designed to relieve absolute poverty among those towards the bottom.

Paying income support to those who are at or around median incomes means paying them with one hand and taxing it back with the other. Which is not only administratively expensive and wasteful (we have previously estimated the cost of this so-called fiscal churn at at £5-6bn pa), but it is also certain to distort the way people choose to work, and to spend their own earnings.

The dispute over the definition of poverty goes back half a century. That's when the left dreamed up their definition of poverty as a relative concept. They have since argued that welfare should focus on relative income distribution, and they have prevailed, which is how we ended up with the current official definition of the poverty line at 60% of median income.

But that's not what most of us actually think of as poverty, which tends to focus on not having enough food, or a roof over your head, etc. That is the traditional definition of poverty, known as absolute poverty, and in principle, it is the approach we favour. Which is why in Appendix C of our paper we recommend that the Department for Work and Pensions conduct some proper analysis in this area and publish a measure of absolute poverty, comparable to the one produced by the US Census Bureau.

Meanwhile, Labour have left us with a gigantic unaffordable mess, in which welfare is paid not just to the genuinely poor, but also middle income earners, and in some cases all the way up the income distribution - as noted above.


What exactly is a negative income tax?

As you will recall, the TPA welfare reform calls for the scrapping of a slew of existing benefits and their replacement with a single negative income tax (NIT). But no less a person than the Devil himself has since asked us to explain exactly what the devil a NIT actually is. So here goes.

The NIT is an idea atrributed by many to the late great Milt. It's easiest to think of it as a particular kind of means tested welfare benefit. All households are guaranteed a certain minimum income paid to them by the government, whether or not they have any income of their own. But instead of being paid through a separate benefits agency, this one is paid by the tax authority. So it ought to be a lot cheaper to administer. And it ought to make it easy for poor households to increase their own earnings without constantly worrying about how that might impact their benefit entitlements and their net incomes.

Each household is assessed for eligibility on its gross income, much as current income taxes are assessed. Households with no other income get paid the maximum possible amount for their type and size of household (eg more children generally means more cash). And that is paid by the tax authority as a negative income tax - ie instead of money being deducted from their pay packet, a payment is made directly to the family.

Households with some income of their own get scaled back from the maximum, according to an agreed and explicit "taper rate". And depending on the taper rate, at some level of own income, households lose all entitlement to a negative income tax payment.

Now, Milt's original proposal envisaged that the taper rate would be the same as the standard rate of income tax. So as a household's own income increased, their negative income tax receipt would run smoothly into an income tax payment - they'd hardly notice the join, and the whole scheme would be very cheap to administer. In fact, in its simplest form, the NIT idea has often been combined with a flat tax - ie a single rate of income tax no matter how high your income. As in this neat chart:

Unfortunately, given the existing level of welfare benefits a NIT will have to replace, such simplicity is not currently an affordable option. Which is why the TPA proposal envisages a taper rate for the NIT at 55%, rather than the 31% standard rate of income tax plus National Insurance.

OK, is that any clearer? If not, there's more here.

Sunday, July 25, 2010

Heroes Of BOM

A hero in action

Tyler has been contacted by the late lamented and much missed Dr Crippen, who draws attention to this story:
"A director of the Yorkshire Ambulance Service has been disciplined after making a withering attack on 'lazy' NHS staff through Facebook.

In an online discussion, David Forster said the NHS employed 'too many who are lazy, unproductive, obstinate, militant, aggressive at every turn and who couldn't secure a job anywhere outside the bloated public sector where mediocrity is too often shielded by weak and unprincipled HR policies'.

The kindly old Doc is concerned. He wonders what "disciplined" actually means - what Stalinist horrors poor Mr Foster has been subjected to for speaking the truth. Foster has not been available for comment, so he may have already been despatched to the secret NHS re-education gulag on that disused WW2 aerodrome outside Withernsea.

Public servants who blow the whistle have long risked horrific treatment at the hands of the NKVD. And the Doc - now in hiding in his distant rural bolt-hole - suggests that BOM should establish a role of honour for those who stand up for taxpayers whatever the cost.

So we will. The Heroes of BOM. And David Foster is the very first name on the list. Let us hope he doesn't allow himself to be silenced.

Immediately joining him is Stuart Davidson, better known as PC Copperfield. As Copperfield, policeman Davidson wrote a widely read blog, Wasting Police Time, that gave us the facts on what really goes on in Britain's police force. It was later published by the excellent Monday Books.

In his time as a blogger, Davidson blew the whistle on some major crimes - all of them perpetrated by the police against taxpayers. He gave us chapter and verse on the way bureaucracy and a mountain of box-ticking paperwork have utterly destroyed police efficiency.

Needless the say, the NKVD mounted a huge man-hunt to track him down. But he was too clever for them, and before the final stake-out, he upped sticks and left for Canada (exactly as recommended on BOM). He's now a police officer in Edmonton, the capital of oil-rich Alberta from where he sent his article in today's S Telegraph.

He tells us Canadian police are miles more efficient than ours, mainly because they are trusted to do the job. And to illustrate his argument he compares Edmonton's police with Greater Manchester's:
"So how do both forces stack up? Well, there are 10 violent crimes per 1,000 people in Edmonton; in Greater Manchester, Home Office statistics show 16 offences of violence per 1,000 people (in Manchester itself, the figure is nearly 24/1,000, and in Britain as a whole, 15/1,000).

Perhaps unsurprisingly, our 2009 Citizen Survey shows that 89 per cent of residents "have a lot of confidence in the Edmonton Police Service", with 66 per cent saying they feel safe walking alone in their neighbourhood after dark. In the GMP area, only 50 per cent of people think the police are doing an "excellent or good" job, which leaves an awful lot of unhappy taxpayers.

But do we spend more money? No. The EPS budget for 2010 is £150 million – or £150 for every citizen. The GMP budget is £690 million – or £276 for every citizen. They could lose 40 per cent of their budget and still have more cash per capita than we do.

Of course, how you spend money is important. GMP employs 8,232 police officers in a total staff of 13,082, or one person for every 181 members of the public. My force employs about 1,400 officers and 500 civilians – one person for every 526 members of the public.

So with less money and far fewer cops, we do a better job."

Officer Davidson couldn't be clearer. We desperately need him, and those like him, back here. Which is why - despite the fact that he deserted us - we're making him number 2 on BOM's list of heroes.

Number 3 joins our list for a slightly different reason:
"Mark Wheeldon (pic above) was fed up of living on benefits and concocted a plan to get him noticed on the job market. He decided to stand on one of the busiest roundabouts in Stoke-on-Trent, Staffs, and advertise himself to passing motorists during the morning rush hour...

Mark had failed to find work after spending the past two years caring for a former partner who suffers from rheumatoid arthritis...

...he was flabbergasted when, after nearly three hours spent standing in a torrential downpour, timber factory director Vince Champion came to his rescue. He spotted Mark on his way to work and returned to collect him, giving him an an interview straight away and offering him the job just 20 minutes later."

We have often blogged the merits of getting on your bike, and although it would seem no actual bike was involved here, we doff our cap to Mark. Not put off by the fact that he lives in industrial wasteland Stoke, with the highest unemployment in the West Midlands, and let down by the official jobs agencies, he gripped the problem directly for himself. Brilliant.

And we're tempted to add Mark's new employer to our list too. It is a new and rapidly growing company called the The Smart Timber Frame Company. Under founder Colin Oakley (splendidly appropriate name) it has developed an innovative and award-winning system of constructing timber frame houses. And from a standing start, in less than 3 years it has expanded to provide 300 desperately needed jobs in Stoke. Stoke FFS - the place the Luftwaffe never bombed because it looked like they'd already done so, and whose bungling benighted council has been a constant target for BOM (eg see this blog).

So why aren't we adding Colin? Only because we suspect he's depended on public funding to get his company going. And while that doesn't make him any less of an entrepreneurial champion, it does mean he can't be on BOM's value-for-taxpayers heroes list.

Friday, July 23, 2010

Life, Death, And Virtual Councils

How may I help?
Well, for a start, you can stop wasting my friggin' money

I expect you saw the story of the bonkers council that spent £36 grand of real life taxpayers' money on contructing a fantasy life town hall in the internet game Second Life (pic above).
"The cost has been revealed following a Freedom of Information request, including £3,250 for initial workshops and almost £17,000 to an IT company to develop the 'island'.
The council also handed over almost £10,000 to the company for rental and management of the project, £6,000 for a virtual museum and £400 for a statue."
What an outrage. A classic example of a council wasting our hard-earned cash on half-baked rubbish that nobody asked for and nobody ever used (they refuse to divulge how many people used "the facility"). Who do they think they are?

But what really caught Tyler's eye about this story was the name of the council responsible - Tameside Council in Greater Manchester. Because once in another lifetime, Tyler had regular dealings with the officers and councillors at Tameside Council. They were clients of his.

More than that, for reasons we needn't go into, the corporate relationship ended on an extraordinarily sour note. Tyler can still vividly recall being publicly flogged by the Big-I-Am council leader in front of a packed meeting of councillors, officers, and third parties. How Tyler was a disgrace and ought to be ashamed of himself. And later being told by that same leader that he never ever wanted to see Tyler in Tameside again. Literally run out of town.
Well, that's showbiz, and it doesn't help to dwell on such things. So Tyler got on with his life.
But now, years later, this little story has brought it all back. And this time, the boot would seem to be on the other foot. How delicious. Time for a bit of Googling.
For those who don't know, Tameside is a classic Northern council - a rock-solid Labour fiefdom. No fewer than 46 of its 55 councillors are Labour, and it has been Labour controlled ever since it was established in 1974. It is good old North Korean style one-party rule.
In fact, Tameside turns out to be even closer to North Korea than that. Because not only has it been ruled for ever by one party, its leader has been the same individual for 30 years. Yes, that very same individual who publicly flogged Tyler all those years ago. He went on to became the longest serving council leader in the entire country - not quite as long as Kim Il-sung, but getting there.
Of course, just like in North Korea, there has been some dissent among the populace. In fact, there now seem to be several Tameside blogs dedicated to the antics of the leader and his colleagues. Tameside Mafia is one, which among other things has kept a close eye on the number of chauffeur-driven Jags provided for him. Another blog, Tameside Eye (sadly open to invited readers only) posted the leader's very own Downfall vid. Yes, there has been dissent, and it seems to have grown.

So what's this leader's name?

Well, actually we're not going to name him. You'll have to Google it yourself.

Why? Because by an amazing and sad coincidence, at the very moment Tyler - after all these years - decided to get reacquainted down there in the second life cyberspace town hall, it turns out that in real life, the leader has just died. His funeral was yesterday.

Tyler isn't normally one for spooky coincidences. But this, this is spooky. And frankly, rather a shock. After all, despite the flogging, he was a fellow flesh and blood, all too mortal man, earning a crust, and doing what he believed was his duty to his community. Besides, whatever may have happened in the past, it isn't right to bad mouth someone who's barely cold in his grave. We're not going there.

Instead, let's focus on Tameside Council itself. Whatever people like Tyler may say, we're not North Korea. People can vote for their councillors. So how can it be that one party can stay in power like that for ever? Especially when it's quite clear that a lot of the locals have serious misgivings.

Well, part of it has to be that old tribal thing. Most people in places like Tameside just don't vote Tory. End of. Lib Dems? Talk sense will you?

But there's something else going on. The reality is that in real life as well as cyberspace, our councils have become virtual. They are little more than figments of our imagination.

As we've blogged since the start, councils today are essentially an arm of central government. They may still have town halls, and it may say "Council" on the big brass plate, but in truth they have to do not what their local electors want, but what their paymasters in Whitehall tell them to. It's a simple case of follow the money.

In Tameside's case, its gross expenditure this year is budgeted at just under £600m. But less than £100m of that will come from local Council Tax payers. The rest will largely come from Whitehall, in one way or another.

Which means two things. First, the local electors don't get terribly excited about their local elections - they understand that the council is not where the real power lies. And second, the council itself is mainly in the game of ticking Whitehall's boxes.

And fair play to Tameside - they've done a fabulous job on the ticking. The Audit Commission is incredibly pleased, rating them a 4 star council - the very best - which is "improving well", and delivering top notch value for money.

So while you, me, and everyone else out here in the real world thinks spending £36 grand on a virtual town hall is a crap waste of our cash (and in a similar vein, check out their TV station - Tameside TV), in the virtual world of fantasy councils, Tameside is doing a cracking job.

Of course, going forward, it will get a tad more difficult. Gone is the largesse of Labour, spraying Southern tax revenue all over its Northern fiefdoms like Tameside (an estimated £1.2bn was spent there in 2008-09). Instead, they'll face George's squeeze, alongside a Tory determination to rebalance such grossly unfair spending regional spending biases.

But this whole saga underlines once again that we really do need real fiscal decentralisation. Councils should have to raise most of their own cash from their own local taxpayers. Councillors who think it's OK to spend taxpayers' money on computer games should be forced to explain and justify themselves to their own local electors, not some cosseted quangocrat sitting miles away.

In the real world, you can bet nobody outside the Democratic People's Republic of Korea would stay in power for 30 years.

PS Was everyone Tyler encountered at Tameside Council a dope? By no means. In fact, there were some very good quality people there. But most seemed understandably scared of upsetting the leader, and all were locked into a local government system that is fundamentally dysfunctional.

Thursday, July 22, 2010

Time To Lower The Poverty Line

The one-minute summary

[Another long one I'm afraid]

We've blogged the welfare trap many times - the scandalous situation where millions of the workless poor find themselves with virtually no financial incentive to get off welfare and into work, trapped in a life of "indolence and vice" (as a previous generation of reformers so graphically put it)

Yes, we can blame the moral depravity of the welfare recipients themselves, but if you were facing an effective marginal tax rate approaching 100%, would you drag yourself out of bed at 6.30 on a cold wet morning to catch the number 27? Honestly?

The fundamental reason we're in this mess is the structure of the welfare system itself. And that is what we have to attack.

The problem essentially arises from the fact that most welfare benefits are means-tested. So the more cash you earn for yourself, the less you get in welfare. As your own earned income increases, your benefits are withdrawn, and that combined with the fact that you also have to pay tax and National Insurance, leaves you facing those monstrous effective marginal tax rates - much higher than those faced by the highest wedged denizens of the Wharf.

And overlaid on that, there's another problem - complexity. Whereas the Wharf banker faces a fairly straighforward tax schedule - ie he knows what is going to be taken from every extra pound he earns - the welfare recipient faces an extraodinarily complex and opaque system of rules and regulations governing what he will lose in benefits if he earns more. The system has grown up piecemeal over decades and there are now over 50 different benefits, all with different rules and withdrawal rates, and a total of 8,690 pages of guidance for DWP benefits alone. Even the officials can't always fathom it, let alone the recipients. Fraud and error costs us £4.5bn pa.

So what are the potential solutions?

Well, one is to scrap welfare for those of working age altogether. And Tyler has certainly met people who would do that. But old softie that he is, Tyler worries about children starving in gutters. Scrapping welfare is a non-starter.

A much more attractive solution is the Citizens Basic Income, which we have blogged several times. Under CBI, all adults get a standard handout from the state which is theirs to keep whether they work or not. It's a great idea, and would eliminate at a stroke all those crippling marginal tax rates - what you earn is on top of your CBI welfare benefit, not in place of it. The trouble is, in practice, it would simply be too expensive - try as we might, we've never been able to get the sums to add up (see this blog).

And right now, getting the sums to add up is vital. Like the man said, there's no money left. Any welfare reform that needs more money is out.

Which is why down at the TPA we've been crunching some numbers to see whether we could reform the system without spending any more (see full report here).

Fundamentally, what we need to do is reduce those high marginal tax rates facing the workless poor, and give them a real financial incentive to work. The trouble is that to do that we need to reduce the rate at which benefits are withdrawn as a family's own earned income increases. And that makes the system much more expensive.

The solution is one we've blogged many times - in order to fund a reduction in the withdrawal rate, we need cut the basic level of welfare provided. A cut which would in itself increase the incentive to work.

You see, as in so much else, there is an iron law trade-off here. Given a fixed pot of money, we either have to accept the current high rates of benefit withdrawal - with all their disincentive effects - or a lower level of basic welfare provision. We can't have both a high level of provision and low withdrawal rates.

What we've done is to model this trade-off, using official data on the circumstances and incomes of individual UK households.

We propose scrapping most of the existing welfare benefits for able-bodied working age people and replacing them with a single simple benefit - a negative income tax (NIT).

The maximum possible level of the NIT for an individual family would be set as a policy determined percentage of the median income across the country, much as the current official poverty line is already set. But whereas the current poverty line is set at 60% of the median, we've looked also at cheaper alternatives, setting it at 55% and 50% (which is where it was originally set decades ago).

Families with no other source of income would receive this maximum NIT (flexed according to family size). Families with some income of their own would receive lower amounts of NIT, with the amounts tapering away as income increases. This taper is the effective marginal tax rate faced by the family. Crucially, it is clear and open, fixed by policy rather than jumping around all over the place as under the current opaque and shambolic system. We have modelled tapers from 50% to 70% - all a vast improvement on the current 80-90% effective marginal tax rates faced by the poor.

So under our system, with a 50% poverty line, a workless two adult two child family would receive an NIT payment of just under £14000 pa (2008). If they then started earning for themselves they'd lose some of that, and the higher the selected taper rate, the more they'd lose. But the idea would be to keep the taper rate as low as we can afford to encourage work. With for example a taper rate of 55%, that same family earning £10000 pa (gross) would keep £4500, taking their overall income up to £18500 - much more than they'd retain under the current system.

So what would it cost, and what is the trade-off? The following table summarises the results for 2007-08 (click on image to enlarge):

Now in that same year of 2008-09, the current system of welfare for the able-bodied working age poor cost us £63.7bn (see paper for calcs). So that's the maximum amount we can spend.

Which means that 7 of our 12 modelled alternatives - ie all the nicest ones -  are simply unaffordable. We can put them from our minds.

It also means that the lowest possible taper rate we can afford with our current 60% poverty line is 70% - still way too high in terms of work incentive.

And that my friends is why it really is time to lower the poverty line. The current official target of 60% of median income is a major obstacle to improving work incentives for the workless poor. Reducing it to 50% would not only increase the incentive to work directly, it would also free up £20-£30bn pa to spend on allowing the poor to keep more of what they earn for themselves.

And to those who say that dropping the poverty line to 50% would give us children starving in gutters, we say rubbish. Incomes today are so high that even a poverty line at 40% of the median would hardly have people starving. For example, as we blogged here, families in the bottom quarter of today's income distribution are better off than families in the top quarter of the distribution 50 years ago - and they were living the life of Larry (whoever he was).

It's time to take some of those really tough decisions.

PS Yes, we would still rather define poverty in absolute terms rather than relative to median income, as the left prefer. But we are where we are, so let's take one step at a time. A step from 60% to 50% would take us a long way in the right direction (see Appendix C in the report for some more on this).

Tuesday, July 20, 2010

It's Still Getting Worse

No improvement

When it comes to our horrendous fiscal deficit, the Labour Party, the BBC, and the rest of the left have long argued that we can afford to wait before starting with the knife. Today's rather nasty public borrowing stats underline just how deluded (and self-serving) that argument is.

Because once you strip out the effects of the various financial sector support operations - which the government insists are temporary - then borrowing in the first 3 months of the current financial year was actually higher than that in the same period last year. And that despite the fact that the economy almost certainly grew over the period (we'll get the official GDP update on Friday).  And despite the fact that public sector investment spending went down.

So what happened?

What happened was that although tax revenues increased by £8bn - boosted by a £4bn jump in receipts from the higher rate of VAT - all of that increase was used up covering a 6% increase in current spending.

6%! Can they be serious? Here in the midst of Austerity Britain, HMG has somehow allowed its current spending to roar away by 6%? WTF are they doing?

For sure, some of it is accounted for by an increase in the welfare bill, as might be expected with higher unemployment. But when you scrutinise the figures, you find that only acounts for 1% of the 6% overall increase.

The rest?

Well, spending on goods and services (staff and procurement) rose by 3%. Which is somewhat alarming, given all the talk of budgets being pared to the bone.

But the biggest contributor - by far - was the explosive growth of debt interest payments. The ONS says these grew by a pant-wetting 54%.


We've blogged the looming debt interest crisis many times (start here). And at the risk of boring you, let's just remind ourselves of the key point - the longer we go on running these horrific deficits, the worse it's going to get. Our outstanding debt will increase, and there is always that risk that the markets will take fright and rack up the interest rate they demand from HMG.

And even though George has announced tight targets for spending cuts than Darling ever did, the debt interest bill is set to spiral anyway.

So next time the BBC tells you we can afford to wait before facing reality, remember this. Remember that the debt interest bill is already sending shockwaves through the public sector accounts, and that we're picking up the tab.

PS It turns out Tyler Senior is the future. No, straight up. He may be 85, but age is all in the mind - he's still the future. You see, he lives in the Royal Borough of Windsor and Maidenhead, and the Royal Borough is one of the four local authorities picked to trail-blaze Cam's Big Society idea - the idea that local authorities, volunteer groups and charities should take over the running – and the budget – of local services, away from the dead hand of central government. And as it happens, Tyler Snr is in pole position to take a leading role. Because he is already one of the driving forces behind a highly active and well-supported community group - precisely the kind of operation on which Cam is going to base the future. Time to find out how you milk get funding from Cam's Big Society Bank.

Monday, July 19, 2010

How Big Is The Government?

[NB Anyone not ready for full frontal descriptions of government accounting conventions should look away now]

Just how big is our Big Government?

One of the key measures - the one we quote in our sidebar - is public expenditure as a percentage of GDP. And it is important. Because it shows how much of our national income has been grabbed by politicians to spend as they wish, rather than leaving it with us to spend as we wish.

In the most recent complete year (financial year 2009-10) the Treasury says that percentage was 47.5%, which we have rounded to 48% for the sidebar.

But as several readers have pointed out (most recently Bill D), 48% is significantly lower than some other widely quoted estimates. In particular, the OECD gives a figure around 4-5 percentage points higher, quoting 52.5% for calendar year 2010. Which has the politicos outrageously controlling more of our our income than we do ourselves.

What's more, the OECD's figures show that Britain's politicos have managed to grab a bigger slice of the national pie than the politicos of virtually any other developed country. The average percentage across the OECD is 44.4%, and the only top 10 economy with a higher percentage than us is France (55.9%).

So who's right?

Start with the Treasury. Its figure is calculated by taking what they call Total Managed Expenditure (TME) as a percentage of GDP at market prices. And TME is defined as follows:

"TME is an aggregate drawn from National Accounts. It covers the current and capital expenditure of the public sector, net of some receipts. It therefore includes expenditure of central and local government and also the capital expenditure of public corporations. TME excludes grants and interest payments between parts of the public sector (as it is a consolidated measure) as well as all financial transactions (such as lending). So TME is the expenditure side of the equation that gives public sector net borrowing, a measure of the fiscal stance."
Sounds sensible. In 2009-10, TME was £669.3bn, GDP at market prices was £1408bn, so the public spending ratio was 47.53%.

What about the OECD? Its figure also uses GDP at market prices, but it draws on a different definition of government spending. Instead of TME, it takes the "Total Outlays of General Government", defined as follows:

"The figures for total outlays consist of current outlays plus capital outlays. Current outlays are the sum of current consumption, transfer payments, subsidies and property income paid (including interest payments). Data refer to the general government sector, which is a consolidation of accounts for the central, state and local government plus social security."
So what's the difference between that and the Treasury's measure?

The big difference is clearly that the Treasury's definition of spending is wider. It focuses on the entire public sector, including public corporations (ie nationalised companies), whereas the OECD restricts itself to so called General Government - ie just central and local government, excluding public corporations.


Except shouldn't that mean the Treasury's number ends up bigger?

And here we enter the realm of riddles, wrapped in mysteries, inside enigmas. If the Treasury uses a broader definition of spending, you'd expect it to end up with a higher figure for the size of government. So WTF is going on?

Tyler has been scrtching his head about this for some time. He's burrowed into explanatory handbooks, applied his microscope to smallprint footnotes, and even consulted one of Britain's foremost experts on such matters. All to no avail. He's still bemused.

However, a rough explanation is emerging. And it says that the Treasury's version of public spending is seriously understated.

The reason is that the TME measure is not a clean measure of gross spending. It nets off certain receipts to give what is only a net measure of spending. In contrast, the OECD seems to have a much cleaner separation of outlays and receipts. And that probably explains why the OECD gets both a significantly higher figure for spending and a higher figure for receipts.

One example is that TME includes only a relatively small net figure for the annual cost of those notorious unfunded public sector pensions (£3.1bn in 2009-10). But in reality, there is a substantial gross cost, partly offset by the receipt of contributions, and partly offset by non-recognition of the true annual cost accrual. And according to Table D1 in PESA 2010, these two items together reduced the pensions cost included in TME by £37.6bn (net of pensions in payment).

Which is very interesting. Because £37.6bn is equivalent to nearly 3% of GDP - in other words, the bulk of the unexplained gap between the Treasury and OECD estimates for the share of public spending in GDP.

Bottom line?

We are switching our source for the size of government from the Treasury to the OECD. As a result our sidebar number increases from 48% to 52%.

At a stroke our Big Government just got even bigger.

PS Very interested in hearing from anyone who thinks Tyler's got this wrong, especially if they can explain the difference between the Treasury and OECD calculations.

Saturday, July 17, 2010

BBC - Don't Starve It, Flog It

There must be some people who'd pay to watch this

At last, a Tory government that's going to grip the BBC. Kultur Kommandant Jeremy Hunt says cutting the Telly Tax is under active consideration.

Hurrah. It has long been obvious that the BBC is a major roadblock to smaller government and serious public sector reform, and however much it squawks, it has to be tackled.

But cutting the licence fee on its own is not such a great idea. All that will do is starve the beast of funds and weaken it. Far better to keep it healthy and drive it to market soonest.

Consider a few sums.

The BBC's total annual revenues are currently running at £4.6bn (2008-09), of which the telly tax comprises £3.5bn, and further government funding (the World Service) comprises £0.3bn. So total tax funding is £3.8bn.

Let's assume the BBC is privatised and the tax funding ends. The question then is how much of that £3.8bn would the BBC be able to recoup from subscriptions and advertising revenue?

In truth, nobody has the faintest idea. But for many, the BBC is a compelling brand, and so we'll assume it can hold on to half the total. In which case, its total revenue would be about £2.7bn pa (ie its existing £0.8bn non-tax revenue plus half its existing tax revenue).

The next question is how much could we raise from flogging a big established media company with revenues of £2.7bn pa?

Assuming the BBC could match BSkyB (and if not why not?), it would deliver a net profit margin approaching 20%. Which in the BBC case would be around £500m pa. And applying the current BSkyB market multiple to those earnings - its 19x ratio of market price to earnings - we can get a rough valuation for the BBC.

And that valuation is getting on for £10bn.

Could the Exchequer use £10bn right now?

You know, I rather think it could.

Don't starve it, flog it!

PS We've contacted BOM's man on the Wharf with the gigantic company valuation spreadsheet to check the numbers. Doubtless he'll say we've misinterpreted the fine print of BSkyB's financials, at which point we'll amend our figures. But meanwhile £10bn it is.

Update BOM's Wharf correspondent has now reported back. He reckons our estimated £10bn price tag is far too optimistic. He points out that the BBC's gold plated pension scheme has generated an unfunded debt of £1.6bn (Sky has no pension debt) which any buyer would lop straight off the price. Moreover Sky's profit margin is actually closer to 10% rather than 20%, so we've overegged the BBC's likely profitability. Plus a few other things. So his bottom line is £4bn.

And just for the record, here's what he says:

"If you somehow dump the pensions on the government, flog off all the real estate, move everyone to Manchester AND match Sky's margins while keeping 25m licence fee payers on board you are talking real money. If somehow you can also start charging for premium content and advertising as well the BBC could be worth over £25bn, but frankly none of these things are going to happen.

The firm has a culture of complacency and entitlement so margins (and pensions) will stay the same. I am reliably informed that many BBC staff don't like the idea of moving up north so they are quitting the BBC payroll, starting media consultancies and charging the BBC for the same work they did before, still based in London. So while assets may get sold costs will go up possibly drowning out the effect of the disposals. Compulsion is the only reason people pay for the BBC. I would expect a 50%+ fall in licence fee payers if the rate stays the same. ITV1-4, C4/E4/M4/F4 and Sky News are all free so why pay? People pay for Sky because it has hundreds and hundreds of channels and premier league football. They will not pay for documentaries about how grim it is up north, etc. The BBC doesn't have any premium content other than Eastenders, some sport, arguably Doctor Who & other kids shows and the external stuff not bid for by Sky, ITV or C4. Advertising would be politically impossible even after privatisation. It would probably be a condition of the sale.

The BBC may be huge but Sky has 40% as many subscribers and juices 3.5x the money out of them before you even get to costs (partly due to phone and broadband). They have a similar amount of invested capital on the balance sheet and NO PENSION DEBT. Frankly I would expect them to be worth much more than the BBC. No wonder Murdoch Sr. is trying to buy out the free float."

Yes, well... we can't really argue with that.

We'd still do it though. And for all those commenters who say they don't want telly with ads, we'd trust the market to develop a subscription based service with no ads.

Friday, July 16, 2010

Prison Works

More good news

As regular readers will know, Tyler is one of those New Jerusalem deniers. And when it comes to Labour's good news crime stats, he's always been particularly sceptical (eg see this blog).

Yesterday we got the final instalment of those stats - the annual update of crime for 2009/10 as recorded by the police, alongside the results of the British Crime Survey (ie the crime opinion poll). And - surprise, surprise - both showed another fall. Naturally the BBC is very pleased:

"The number of crimes committed in England and Wales has fallen to its lowest level since records began in 1981...

...The statistics show that crime has fallen by 43% since 1997, leaving Labour able to claim that its level is lower now than when Tony Blair first entered Downing Street."
Oh, no wait... that second sentence only appears in the BBC's sister publication (the Grun). Anyway, the left is delighted, especially since it supports their argument that we don't need to build any more prisons. Crime is already plummeting they say, so why waste money on prisons? The cash would be much better spent on restorative arts projects for rapists.

But whatever the BBC and the Grun say, our splendid new Home Secretary clearly shares our scepticism. Theresa says:

'Any reductions in crime are welcome, but we know these statistics offer a partial picture about the true level of crime. And there are many offences, including antisocial behaviour, which are not always reported or fully recorded, but which ruin too many lives...
We are determined to restore trust in crime statistics and are currently considering how they should be collected and published in future. We are working with the UK Statistics Authority and others to consider this carefully.'
Good. We look forward to getting stats that at least vaguely approximate our actual experience of rising crime (see previous blog, and this blog for an account of the most recent criminal outrage to hit Tyler Towers).

But just for a moment, let's suspend our disbelief. Let's for once listen to the mellifluous sermons of Bishop Snow and the Rev Easton, and let's assume the existing stats are the unvarnished truth. Let's assume that crime really has fallen by 43% since 1997. What does that tell us?

Well, the obvious, jump-off-the-page, shout-in-your-face, message is that Michael Howard was right - prison really does work.

Let's take a look. The following chart shows how measured crime has fallen since 1995, on Labour's preferred British Crime Survey measure. It also shows how the number of prison places (strictly, the prison population) has risen over the period. For ease of comparion, both series are shown in index form, with 1995=100.

As we can see, as prison numbers have increased, measured crime has fallen (the gaps in the early years reflect gaps in the reported BCS numbers).

Let's look at the statistical relationship more closely. The following chart shows a simple regression of each year's crime numbers against the same year's prison numbers:

Now for those of you who never did get round to reading Teach Yourself Statistics, those regression results indicate a very close relationship between the two series. A very close relationship indeed. An R2 of 0.88 is equivalent to a correlation coefficient of 0.94 - as near as damn it, a perfect fit.

And specifically, what our estimated regression equation says is that each additional prisoner is associated with 275 fewer crimes. In other words, prison works. Bigtime.

What? What's that you say? Correlation does not imply causation?

Well, no, to be sure, you must be right.

Yes. Yes indeed. Well remembered.

I mean that extraordinarily close relationship could be caused by all sorts of other things.

Like... ummm... well, maybe the police have become so much more efficient that that they are preventing crime before it even happens. Could that be it?

Hmmm... no... that can't be right... not our police with their plummeting detection rates and their social worker Chief Constables.

No, it must be... aahhh... yes, better burglar alarms and Krooklocks on cars.

And yes, there must be some truth in that. Mustn't there?

Wellll... you really can't help spotting that those crime stats went on rising right up to the very point where M Howard got his massive prison programme going (see chart at top). Surely burglar alarms and Krooklocks were already improving long before then. How do you explain the sudden break?

Of course, it is possible that all those sermons from the BBC and C4 pulpits have finally done the trick. That the sinners hath repentethed, and the lions hath laid down with the lambs.

Yes, that's possible.

Although it doesn't yet seem to have happened round Tyler's way.

Thursday, July 15, 2010

OECD Supports George

Labour left us with hugely over-priced public services

Contrary to what the BBC and Labour would have you believe, the mainstream economic consensus strongly supports George's assault on the fiscal deficit. They support his plans to squeeze public spending and cut welfare benefits, and moreover they urge him to get on with cutting business and income taxes.

The latest OECD commentary is a striking addition to this support. The OECD says:

"The comprehensive budget announced by the government on 22 June was courageous and appropriate. It was an essential starting point... OECD shares the UK government’s position that fiscal consolidation is a policy for growth...

UK productivity is hampered by slow or partially implemented structural reforms to public services and low levels of resource utilisation. Healthcare and education services are relatively inefficient... The cost of producing public services in the UK is well above the OECD average and has risen significantly over the past decade..."
So the OECD agrees that cutting the deficit is the way to boost sustainable growth - not undermine it as the left claim. They also agree that our public services have grown inefficient and costly under Labour, and require serious surgery.

On taxes, they support George's move to cut the Corporation Tax rate, but urge him to go further. In particular, they want him to reverse Labour's crackpot increase in the top rate of income tax to 50% (as we've blogged previously, it will damage incentives and may well end up reducing tax revenue).

The only question now is WTF the OECD - who we pay £15m pa for BTW - didn't say any of this while Labour were still at the controls? It might have saved a lot of grief if they'd told us then, before we'd mortgaged the grandchildren.

It all comes back to that independence thing. The OECD is an excellent organisation in many ways, and employs a lot of very talented people. But unfortunately, any organisation directly funded by politicos is always going to have problems speaking the unvarnished truth unto power - especially in public. And doubtless Labour could argue that very point applies equally well to this latest report.

Which brings us back to the unfortunate events surrounding Alan Budd and the Office for Budget Responsibility. Here was a genuine attempt to establish some independence from government, headed by a man of apparently unimpeachable integrity with absolutely no ambition to do the job long-term. But it's still come horribly unstuck. Yes, it's cock-up rather than conspiracy, but the damage has been done.

As we've always said, the OBR must be put on the same footing as the National Audit Office. It must be accountable to Parliament and funded by Parliament, not the Treasury. Of course, there could be problems with Budget secrecy, but the NAO (whose staff sign the Official Secrets Act*) has managed to be a fairly leak-free zone, and there's no reason to think the OBR couldn't be the same.

Somebody needs to be to cracking on with this right now. So let's just hope they are.

*Footnote - Just for interest, here's Alan Budd's appointment letter, setting out the various secrecy conditions applying to the role. Along with his pay of £2885 per week.

Wednesday, July 14, 2010

ONS Gets Serious On Public Debt

It used to be so much easier to keep track

Yesterday the Office for National Statistics published a very interesting paper on public debt. For the first time in an official publication, it brings together estimates of all those off-balance sheet Enron items we've blogged so often - public sector pensions, PFI, state pensions, bank bail-outs, nuclear decommissioning - the lot.

And it gives a pretty evenly balanced commentary on the kind of liabilities involved, and some of the estimating problems. Yes, much of this material has been published in dense technical form before, but this paper is much more accessible and mercifully much shorter (a mere 26 pages).

The paper opens with a statement it's worth quoting in full because we might almost have written ourselves:
"Just as for companies and households, the public sector’s balance sheet is central to assessing its financial health. Such a balance sheet would set out the public sector’s assets – what it owns or is owed – and its liabilities to others. A limitation of traditional balance sheets is that the liabilities they include are defined quite narrowly and so exclude a range of potential obligations to others. To ensure that fiscal policy setting expenditure, taxes and government borrowing – is as well based as possible, and in the interests of transparency, the publicly available information on the range of public sector assets and liabilities needs to be as complete as possible."
To which we can only say, hear, hear.

The bottom line is that the ONS is now actively considering whether to include a whole raft of those Enron items in the official measure of public debt. And here's their summary of how that might look (you'll have to click on image to read):

So what does that lot add up to? The Mail's Steve Doughty has done the sums and makes it around £4 trillion - that is, well over four times the current official £0.9 trillion National Debt (Public Sector Net Debt - PSND).

The largest additional items - all of which we've blogged many times - are:
  • Debt of nationalised banks - ONS reckons RBS and Lloyd's debt will add £1-1.5 trillion; they're still working on the exact number but will definitely be including it within the next few months
  • Unfunded public sector pensions - ONS says the liability is up to £1.2 trillion (interestingly, that's an external estimate from actuaries Towers Watson, rather than the lower - and now discredited - official figure)
  • Unfunded state pensions - ONS quotes official estimates of £1.2-1.4 trillion
  • PFI - ONS quotes a figure of £200bn (undiscounted)
  • Nuclear decommissioning - £45bn
Now, the ONS has not committeed itself to adding all of these to the monthly figures for Public Sector Net Debt, but it does sound as if it intends to publish regular updates of wider public sector liabilities. Which we wholeheartedly support.

Of course, in estimating these wider liabilities, we will expect the ONS to maintain its own high standards of integrity and impartiality.

For example, the official figures it quotes for unfunded state pension liabilities are almost certainly a serious under-estimate. Whereas they quote £1.2-1.4 trillion, external analysts calculate a figure at least twice that (eg see this excellent IEA paper by Nick Silver, which conservatively puts it at £2.75 trillion, and as we blogged yesterday, in terms of the ongoing liability, it isn't difficult to come up with numbers that are a multiple of even that).

Also we're not convinced by the ONS practice of netting off liquid assets from its calculation of public debt. What taxpayers need to know is the size of our gross liabilities. Sure, there may be some assets to set against those liabilities, but those assets can never be entirely secure even if they are supposedly liquid. For example, the deposits our local authorities placed with the Icelandic banks were netted off as liquid assets, but as we later found out, they were most assuredly not secure. And the same goes for the liquid assets of RBS and Lloyds, which ONS are proposing to net off against their liabilities. Doing so will reduce the net debt figure by about £1 trillion, even though taxpayers are actually on the hook for the entire gross debt.

Still, overall, this is another step in the right direction. It is crackers for the nation to depend on external analysts and Tyler's fag packet to calculate the real National Debt, when we employ an army of statisticians who could do the work so much more thoroughly.

The ONS must get cracking and publish the results openly and fearlessly. It's time for us to know the complete and unexpurgated truth about our finances.

Tuesday, July 13, 2010

The Biggest Debt Of All

We were all the future once

This afternoon Tyler got a bit of a shock in the Wandsworth one-way system. There right in front of the motor, large as life, was none other than the legendary Ronnie Wood. Yes, crossing the road at the lights - dark glasses, fag in mouth, young lady on his arm, slightly weaving about, the works.

Which got Tyler thinking. Old Ronnie is getting on a bit these days. In fact he's just turned 63, and he'll soon be drawing his state pension*. He's become part of the problem.

Problem? Yes, the horrible fact that we've got far far too many people about to draw their state pensions. Here's the latest official forecast of the burden they will be placing on the national finances:

As we can see, on current policies, the burden increases from around 5.5% of GDP up to around 7% - and many experts think even that estimate is too low.

Now, we've blogged this many times, but since Tyler is currently working on some updated calculations of the real national debt, he thought it would be fun to work out what this burden comes to in terms of debt today.

To make the calculation easy we'll average the Treasury's forecast at 6% of GDP. So instead of having the burden grow as it does on the Treasury forecast, we'll assume it stays at 6% for ever - ie we'll deliberately err on the side of underestimating the debt.

Now, to translate all those annual figures into a single debt figure we have to convert each one into a present value, discounting by an appropriate interest rate. Since these pensions are a government liability, the appropriate interest rate is that on government debt. And since the liabilities are index-linked, it has to be an index-linked gilt yield (the government has now relinked them to earnings rather than the RPI, so perhaps we ought to use an earnings linked gilt, but since there isn't one, ordinary ILG will have to do).

As of now, long-term ILG yields are under 1%, but to keep it simple we'll assume 1% (again erring on the side of underestimating the debt).

What we have here is known as a perpetual annuity (or perp for short). And its present value can be easily calculated with this handy formula:

In our case, A = 6 (% of GDP), and r = 0.01 (which is simply our 1% discount rate expressed as a decimal, ie 1/100). Which comes to 600.

So, what we're saying is that the present value of our future state pension burden, measure as a percentage of GDP, is a cool 600%.

Which, given that GDP this year is estimated by the OBR at £1474bn, is equivalent to a debt in money terms of... gulp... can this be right... £8.8 trillion.

And that gives us a frightening perspective on HMG's contention that our National Debt is "only" £0.8 trillion - less than one tenth of our state pension debt.

Maybe as a public duty Tyler should have jumped the Wandsworth lights and at least made a start on the problem.

*Footnote Some unkind people reckon Ronnie must be far older than 63. They reckon he must be about 250. But what they forget is that Ronnie is a close associate of Keef, who is well known to be immortal. They may both look 250, but that's only because of all those life-extending substances they've ingested over the years. Celery and stuff.

NHS Reform - How Will The Money Work?

Keep your eye fixed firmly on the money

Tyler has now read Lansley's white paper, Equity and excellence: Liberating the NHS. An ambitious title, but then again, Health Secretaries have never been lacking in the ambitious titles department.

To start with the positive, there's lots of good stuff about putting patients first, more choice, better information, clinicians in charge, and an end to politically driven micromanagement. All problems we have blogged to death, and all problems we are glad to see Lansley promising to tackle.

In fact, we'll go further. Lansley has surprised us by just how radical he is apparently prepared to be. Abolishing the wasteful bureaucratic PCTs and focusing authority in the hands of practising clinicians is a big step, beyond anything we'd expected. He's also going to encourage more private providers into what is clearly the basis of a real market system - all good. Even more encouraging, judging by his punchy appearance on yesterday's Newsnight, Lansley suddenly looks like a man reborn and spoiling for the fight.

But as always, the key question for BOM is how will the money work? And there, the white paper is worryingly vague.

Let's start by reminding ourselves how the money works in the grocery market.

You the punter have the money, and you choose whether to go to Tesco, Sainsburys, Asda, or whoever. You are very keen on getting good products at good prices, because, hell, it's your hard-earned money. Which doesn't mean you cross-check products and prices every week - life's too short. But all the supermarkets know that if they start taking the piss, sooner or later you'll rumble them and you'll start shopping somewhere else.

Now, the supermarket doesn't produce the goods itself. It commissions suppliers to produce all its msg potato wedges and trans-fat pizzas, and it screws those suppliers hard on price and quality. Both are determined by head-to-head negotiation. You the customer don't get involved in any of that, both because you haven't got time, and also because you know absolutely naff all about producing pizzas let alone pricing them. You trust Sir Terry Tesco to make those calls for you. And Sir Terry only survives if he gets those calls right enough for you to go on giving him your custom.

So how does the Lansley NHS model compare?

To start with, you won't have the money. The money will still come from the big black pot up in Whitehall (see Lansley's wiring diagram above). Which straightaway weakens your role in the entire process.

Yes, Lansley does talk about giving we punters "personal healthcare budgets", but in truth, that's never going to work universally and he admits it (no, you can't have that critical second operation because you've already used up your personal budget).

Instead, the "money will follow the patient". How? Lansley is not yet sure:
"... the Department will start designing and implementing a more comprehensive, transparent and sustainable structure of payment for performance so that money follows the patient and reflects quality. Payments and the ‘currencies’ they are based on will be structured in the way that is most relevant to the service being provided, and will be conditional on achieving quality goals."
Hmm. Talk of "currencies" rings a rather loud alarm bell. We already have a perfectly good currency, and it's called the pound sterling. It's simple, clear, and relates directly to the real world outside the NHS. You can bet Sir Terry insists on the real thing, and so should Lansley. The last thing the NHS needs is an outbreak of Funny Money.

And also, how much money will follow the patient? Apparently it won't be the same for all patients:

"Our principle is that funding should follow the registered patient, on a weighted capitation model, adjusted for quality. We will incentivise ways of improving access to primary care in disadvantaged areas."
"A weighted capitation model, adjusted for quality". Riiiight. WTF does that actually mean for the average punter? And who decides what the relative weights are for different types of punter? Will someone with Tyler's chronic conditions get more capitation than an A1 specimen? And if not, what's to stop a profit maximising GP refusing to take Tyler, should he move to Eastbourne? There are an awful lot of dots still to join up.

Then there's the issue of pricing. Whereas Sir Tel sorts out prices mano a mano with his suppliers, in Lansley's reformed NHS, prices for specialist treatments will still be mandated by the same old Commissars in Whitehall. The only difference is that prices will now be set on the basis of "excellent care", rather than bog-standard care:
"We will rapidly accelerate the development of best-practice tariffs, introducing an increasing number each year, so that providers are paid according to the costs of excellent care, rather than average price."
In Tescos, their excellent care range is called "Extra Special" and it's more expensive than the standard range. So does excellence mean the NHS tariffs will be increasing? Or does the word "excellent" actually mean excellently cheap? Again, there are an awful lot of dots still to join up.

But look, let's not carp. Lansley has made a reasonable start, and he is sounding a lot more radical than we'd ever expected. He seems intent on creating a market-based system, intent on broadening the range of providers - including private for-profit providers - and intent on getting those in the NHS to learn the new skills and responsibilities they will need outside the Stalinist world of state monopoly healthcare.

Let's give the man a chance.

Oh, and let's hope Cam gives him the time he needs to implement his plan. The NHS has had more than enough revolving door political masters.