Sunday, October 31, 2010

Ripping Your Face Off


This could soon be you

One of Tyler's favourite financial market memoirs is Frank Partnoy's FIASCO, his account of life as a Morgan Stanley derivatives salesman during the 1990s:

"The derivatives group received its marching orders from the firm's leader, John Mack. Following Mack's lead, my ingenious bosses became feral multimillionaires: half geek, half wolf. When they weren't performing complex computer calculations, they were screaming about how they were going to "rip someone's face off” or "blow someone up.” Outside of work they honed their killer instincts at private skeet-shooting clubs, on safaris and dove hunts in Africa and South America, and at the most important and appropriately named competitive event at Morgan Stanley: the Fixed Income Annual Sporting Clays Outing, F.I.A.S.C.O. for short. This annual skeet-shoot tournament set the mood for the firm's barbarous approach to its clients' increasing derivatives losses. After April 1994, when these losses began to increase, John Mack's instructions were clear: "there's blood in the water. Lets go kill someone.” We were prepared to kill someone, and we did. The battlefields of the derivatives world are littered with our victims." (and see here for a longer excerpt)
Marvellous. The raw beating heart of capitalism - the very thing that's driven economic progress for at least the last three centuries. And thank God for it (terms and conditions apply - like staying within the criminal law).

There's just one thing - don't ask me to pay for any losses these dove hunters incur when they accidentally blow their own heads off.

Which brings us back to the key question of HTF can we let busted banks go bust without destroying Mom and Pop's savings and wrecking the economy?

Because two years on from the Crash, and despite all the brave talk, our politicos and regulators have still not agreed how to do it. There's been no serious discussion of the obvious step - splitting the high street "utility" banks from the casino banks down on the Wharf (aka a new Glass-Steagall - eg see this blog). Instead, energy is wasted on chasing headlines over bankers' bonuses and bank levies.

This morning Liam Halligan has another excellent article on real bank reform, highlighting a speech made this week by Bank of England Governor King:

"King has now gone as far as he can in calling for the committee to recommend a radical bank split, without publicly ordering them to do so.

"In the end, clarity about the regulatory perimeter is both desirable and unavoidable," said the Governor of the Bank. "Radical solutions offer the hope of avoiding the seemingly inevitable drift to ever more complex and costly regulation."

According to King, City big-wigs are now making "dubious claims to resist reforms that might limit the public subsidies they have enjoyed in the past".

The Governor is taking on one of the world's most powerful lobbies. Among those at the top table, he is doing it almost alone. That's why the rest of us need to get squarely behind him."
Hear hear.

As we've blogged many times, we urgently need to break up the banks. They should not be allowed to exploit the unavoidable taxpayer guarantee on high street deposits in order to raise cheap funding for playing the tables. And as we saw all too clearly in the Crash, our regulators are simply not smart enough to manage institutions that cover both high street and casino activities. Splitting is the only serious option.

But among those City big-wigs, there's hardly an acknowledgement the issue even exists. Indeed, when at the recent Tory Conference Tyler put the question to a City panel chaired by FT editor Lionel Barber, Barber immediately moved on to the next question. Nobody on the panel (including Treasury minister Mark Hoban) was even prepared to acknowledge the question, let alone attempt an answer. Pathetic and worrying.

So let's remember precisely what's going on.

The losses of the banks have been passed on to us taxpayers. We are now holding the baby, courtesy of effective bank nationalisations and continuing blanket guarantees covering all banks. At the same time the printing press has been slammed into overdrive, driving interest rates for savers down close to zero, and well below the inflation rate. The banks are being encouraged to fund their losses and recapitalise themselves by ripping the face off savers.

And on the subject of inflation, we are all quite aware that UK inflation continues to run well above the supposed 2% target - RPI inflation is up at nearly 5% pa, and even the government's preferred (and sytematically lower) CPI measure is over 3%. But do we all understand how bad the international picture looks?

Commodity prices in dollar terms are up 50% from the post-Crash lows, and still increasing:


And things have got even worse since September (the last month shown in the IMF chart). According to the Economist Index, dollar prices have risen by a further 8%, taking the 12 month increase to 31%.

Deflation it ain't, and in sterling terms the picture is even more alarming. The Economist says sterling commodity prices have risen by 35% just in the last year.

Against that background, the US Treasury was last week able to sell a bunch of its index-linked bonds (TIPS) for an extraordinarily high price. For the first time ever, it was able to issue these bonds on terms that guarantee their holders will lose money in real inflation adjusted terms.

Why would anyone buy such things? Because they're scared stiff about future inflation and would rather lock in a known modest loss now than take a chance on a much bigger inflation loss later on bonds that are not index-linked. Yes, my friends, out there across the Atlantic the inflation storm clouds are gathering.

So what to do? How can you make sure it's not your own sweet face that gets ripped off in the coming hurricane?

To be frank, there's not necessarily a lot you can do. One way or another we in Britain have to accept a permanent cut in our consumption to work off all that debt we've built up. In the process - whether through higher inflation, higher taxes, or job losses - an awful lot of faces are going to get ripped.

The one thing we can do is make sure we don't allow our politicos to wriggle out of the difficult decisions needed to stop the same problem arising again somewhere down the road. Which is why we should do what Liam H suggests - back Merv as he pushes to break up our dangerous too-big-to-fail megabanks.

Saturday, October 30, 2010

Still Paying For The EU


Following Mr Cam's, ahem, "triumph" in holding the EU budget increase to a mere 2.9% next year, we thought we'd remind ourselves just how much we've paid in since we joined in 1973.

Because the numbers can get very confusing. All kinds of different definitions of gross and net - pre and post-rebate - get chucked around, often in a deliberate attempt to confuse us.

So let's remember the key points.

Our gross contribution to the EU budget comprises a number of different elements, including revenue from tariffs imposed on goods imported from outside the EU, and a share of VAT receipts. The most important element by far is a pro rata charge based on our share of EU gross "national" income. Currently the overall total is running in the range £12-14bn pa.

Fortunately, up until now we have not had to pay the full amount implied by those rules. And that's because of the rebate negotiated for us by the blessed St Mags back in the 80s.

So what we need to look at is our gross contribution net of those rebates, and that's what's shown in the chart above (the data sources are here and here).

As we can see, in the latest completed year, 2009, we handed over £7.8bn, around £300 for every British family. In real inflation adjusted terms, that compares to a cost of £1.6bn in our first year of membership. So in real terms the costs have increased almost fivefold since we first joined.

And over the entire period of our membership, we have paid total membership fees of £170bn, which is £257bn at 2009 prices. And that is a little over £10 grand per family.

Now it is true that some of this cash comes back again in the form of EU spending in the UK. For example, around £4bn goes on subsidising our old friends the farmers (or "the preservation and management of natural resources" as the EU now prefers to call it - see here). But in terms of the burden on UK taxpayers, that is immaterial - we are paying taxes to fund programmes of the EU's choosing, not ours (farming subsidies would not be high on Tyler's list of worthy spending projects).

Moreover, the cost of our EU budget contributions is only one element of the overall cost of EU membership. In particular, we also need to add in the £5bn+ pa it costs us through paying food prices much higher than the world market. And here's Jamie Oliveoil to remind us just how that works (and see this blog):



Like Jamie says, enjoy.

Friday, October 29, 2010

Best To Be Bold


Daft - but not quite as reported*

Nobody said welfare reform was going to be easy. There were always going to be losers, and the welfare lobby was always going to scream very loudly.

But if we are ever going to grip our ballooning £200bn pa welfare bill and provide real work incentives, serious reform is absolutely essential. And to do it right, we must be bold. Nibbling away at the margins is very likely to leave us with the worst of both worlds - plenty of losers and screaming, combined with a welfare system that still isn't fit for purpose.

Take the row over Child Benefit. This morning we got the latest instalment, in which the Treasury is vowing to impose fines on any higher rate tax payer who fails to declare his or her partner is in receipt of CB.

Which is fine, except that the partner may not want to say. After all, a couple's tax affairs are separate these days, and CB is paid direct to the female partner specifically so she can keep it away from the nasty beer swilling brute she's forced to live with (well, that's what Pol says anyway). And what happens if the man/woman doesn't realise he's a top rate tax payer, perhaps because of an unexpected bonus?

The basic problem is that we currently have no way of taxing couples as a unit. Tax is levied on individuals, so HMRC doesn't automatically know the overall household income.

And that is a key reason why our own cuts package last year included the complete abolition of universal Child Benefit (see this blog). In its place, following an existing plan put forward by Reform, we proposed beefed up payments to poor families under the Child Tax Credit, which is means tested on household income. True, in an ideal world none us wants more means testing, but since this is the real world with an increasingly limited budget, that's something we just have to put up with.

Had George followed that line, he'd have avoided all these complexities with fines and the indefensible disparity between one and two earner families. He'd have had a clean workable solution - at least pending the more radical universal benefit reforms promised by IDS.

So why didn't he do it?

You know why. Universal Child Benefit is a totem - the very embodiment of the welfare state. Also, he didn't fancy explaining to those Ordinary Hard Working Families (OHWFs) on £30-40k that they are to lose a couple of grand a year - even though at some stage they could look forward to commensurately lower taxes.

So we've ended up with a dog's breakfast. Failure to be bold and go for a workable long-term solution has landed us in a mess.

Let's hope there's no backsliding on the the other great welfare change - cutting Housing Benefit. The much bolder reforms there find themselves firmly back under the spotlight, courtesy Boris's most unfortunate remarks yesterday about "Kosovo-style social cleansing"*. Here's the TPA's Matt Sinclair arguing the case last night against the Bishop:



We've blogged Housing Benefits many times, and we took a good look at the current situation here. We showed how under Labour, spending soared by 35% in real terms, although the number of recipients barely changed - in other words almost all the money went on pushing up rent levels:


We also showed how in some areas, Housing Benefit dependency has reached 30% of all households, and more. The record is held by Hackney, where an astonishing 43% of all households are on HB:


We noted how many landlords have done very well out of HB, driving returns on their equity as high as 50%.

And we pointed out that the serious economic research in this area shows that it is the landlords who will suffer the biggest hit from cuts. The evidence says that between half and all of the cut in rental subsidy ends up falling on the landlord not the tenant. In other words, rents fall pretty much in line with the cut in subsidy.

But according to the BBC and the rest of the left, the poor are about to be sent back to the workhouse. Indeed, the preposterous Labour MP Tristram Hunt reckons they'll soon be gnawing on bones and putrid horse flesh to stay alive. Tristram is the son of Lord Hunt and was schooled at University College School Cambridge followed by Trinity - we should probably assume he's never sampled bones, putrid horseflesh, or even KFC, and knows as much about life on low income as the Duchess of Buccleuch.

Admittedly George is from a similar background to Trist, but on HB reform he is a lot closer to reality. His bold HB reforms are a vital step in the right direction and he must not allow himself to be intimidated.

Everyone out here agrees that HB recipients should not be funded to live in houses the average taxpayer can't afford, and that may well lead to some relocation. But that's simply too bad - the money has run out.

Nobody's being sent back to the workhouse. And if the reforms lead to anything like the grim Dickensian world Trist describes, Tyler will personally gnaw on the first bone he can find lying in the gutter.

*Footnote  Boris was obviously daft to have referred to Kosovan cleansing. But when you hear the actual interview - as opposed to the hyped up reports of the interview - it's pretty clear he was actually just saying that he wanted to see good transition arrangements for the new system. He wasn't opposing the whole deal, as was reported subsequently. Well, that's what Tyler thinks anyway.

Wednesday, October 27, 2010

Why The Real National Debt Is Real


Last week we published our estimate of the Real National Debt, putting it at a very scary £7.9 trillion, or around £300,000 for every British family.

Since then a number of people have dismissed our figure as grossly misleading, and accused us of scaremongering. So let's just run through some of the objections and see what we think.

1. Our nationalised banks have assets as well as liabilities

£2.6 trillion of our debt figure comprises the liabilities of our two big nationalised banks, RBS and Lloyds. The objection is that we have ignored their assets, and therefore hugely over-egged taxpayer exposure.

On one level, that's true. The banks do have huge assets to set against their liabilities, as is fully acknowledged in our research paper.

But the problem is that nobody - including the banks themselves - knows what those assets are actually worth. Whereas the liabilities are now hanging round taxpayers' necks in their entirety.

The final outcome - in terms of our eventual net loss - is anyone's guess. True, most loss estimates are much lower than the entire liability (as noted in our paper), but nobody actually knows. And given the events of the last two years, we believe it's prudent to understand our potential total liability.

Moreover, even if we were to set aside the entire liabilities of RBS and Lloyds as being in some sense temporary, our estimate of the Real National Debt would still stand at £5.3 trillion, or more than £200,000 for every family.

2. Governments have assets as well as liabilities

The second objection is that even this lower figure hugely overstates the debt, because the government itself also has huge assets.

Again, there is some truth in this. According to official estimates, the public sector as a whole has assets of getting on for £1 trillion (see this excellent ONS article for a summary of the official stats).

But we need to understand a couple of things about these assets.

To start with, they mainly comprise specialised physical assets like motorways and hospitals. And such assets are not readily realisable (ie they are not liquid).

Moreover, even if HMG could sell them, much of their assumed value depends on having someone who wants to use a motorway or a hospital and is prepared to pay for the privilege. Their value purely as building plots or agricultural land would be very much less.

Consider who would pay to use a British hospital. Yes, you guessed it - British hospital patients. The hospital's value to a prospective purchaser largely depends on his being able to charge patients for its use, and patients being prepared to pay.

Except in Britain, as things stand, it's not the patient who pays, but the NHS. Or to put it another way, the government could almost certainly sell its hospitals to reduce the debt burden on taxpayers. But only at the cost of the NHS then having to pay a fee to use those very same hospitals. The net effect - the net burden on taxpayers - remains pretty much the same. The only real difference is that yet another chunk of government debt has been shuffled off balance sheet (cf PFI).

3. We are ignoring the government's future tax receipts

This objection says that we shouldn't get fixated on the government's liability to make future payments while ignoring its future receipts of tax revenues. Our analysis is one-sided and a grossly misleading statement of the true fiscal position.

Hmm.

Let's remind ourselves what our Real National Debt calculation is actually looking at.

It's looking at the government's commitment to make future payments in respect of loans or services it has received in the past. Which is the standard and essential definition of debt (see paper).

Thus for example, we include the government's £1.3 trillion accrued liability to make public sector pensions payments. That relates solely to the service and pension contributions of public sector employees in the past - the pension entitlement they have earned so far. What we are saying is that public employees have provided services and loans (their contributions) to the government that they expect to be repaid during their retirement. It is debt, pure and simple.

Similarly, we include the £2.7 trillion liability to make state pension payments. Again, that reflects the accrued liability in respect of National Insurance Contributions already made in the past against pensions to be paid by the government in the future. It is an undischarged loan to the government.

The Real National Debt adds together all these undischarged liabilities that have accrued over the past and tells us where we currently stand overall.

Yes, of course the government will have future tax revenues to draw on in order to meet its debt obligations. Of course. But the greater the debt obligation in respect of past service and loans, the less of those future tax revenues there'll be left over to pay for future services.

Even today, 28% of the government's tax revenues - more than one pound in every four - goes to service these past debts. Two years ago it was just 24%, and the proportion is growing fast (see this blog).

And that's the key point. The massive growth in these obligations from the past is placing a huge strain on the government's ability to fund services in the future.

Sure, the government has revenue raising powers and can always raise future taxes. But that is precisely why taxpayers should be so concerned at the size of the Real National Debt. Unless we recognise and address the full range of government liabilities, taxpayers face a grim future of rising taxes alongside worse public services.

4. The government could always renege on its pension obligations

Since the government can legislate black is white (subject to EU directives), it could simply renege on its pension liabilities, both public sector and state. So things aren't nearly as bad as the TPA make out.

This is quite a popular objection to our calculation, and it must be said that governments across the world are currently embarked on just such schemes.

But we should understand it is no easy option. Quite apart from the moral question raised by robbing defenceless pensioners, events in France and Greece highlight the political difficulty of making substantial changes to existing entitlements. The losers are very obvious, and in the case of public sector workers, highly unionised. It takes a strong government to face down strike-bound public services and street riots.

Of course, it is easier to make changes to future entitlements - by for example gradually increasing the pension age - and our government must do that. Increasing life expectancy means that we must move the pension age up to at least 70 (as Lord Turner has suggested). But that doesn't help much with the existing accrued liability - the liability we include in our calculation.

And that liability is real, not merely some distant entry in an accounting ledger to be left for our grandchildren. It is here with us now, requiring ever greater payments with each year that passes. Two years ago, the cost of public sector and state pensions was £83bn, this year it's £95bn, and growing fast.

Conclusion

The TPA's calculation of the Real National Debt is designed to show the full extent of the liabilities now bearing down on taxpayers' shoulders. And those liabilities arise from loans and services supplied to government in the past: they are not related to services the government may or may not provide in the future.

Yes, there are assets on the other side of the balance sheet, but even on the most optimistic interpretation they cover well under half the debt.

And yes, there are future tax revenues to service the liabilities. But that servicing already consumes more than one-quarter of tax revenue and the proportion is growing. Taxes could certainly be raised, but that is the very reason taxpayers need to be concerned about the huge size of this debt.

As for reneging on the debt - especially the pension debt - that has been an option for desperate governments throughout the ages. But it is not the easy low-pain option often suggested.

Monday, October 25, 2010

A Forensic Focus On Growth

"When we say we're going to build a new economic dynamism, we mean it.

In the weeks and months ahead, ministers will be developing detailed plans to turn this strategy into action. Everything – from bank lending to skills, green tech to high tech, competition to innovation, international trade to local growth – will be put under the microscope.

That forensic, relentless focus on growth is what you will get from this government."
Thus spake Mr Cam at the CBI conference.

Good. A forensic relentless focus on growth sounds like the very thing we need.

And even better, he explicitly recognises that:
''The new jobs, the new products, the new ideas that will lift us up will be born in the factories and offices you own – not in the corridors of Whitehall.''

Yes, very VERY good.

Just one small point. If he's serious about his forensics, he will want to do whatever it takes to stimulate growth. And that means one thing above all else - tax cuts.

In particular, he has to abolish that economically bonkers 50p tax rate. As we've blogged before, every serious independent analysis says that it will raise virtually no revenue, and may even produce a loss as higher rate taxpayers change their behaviour to escape it (eg see this blog).

Ah yes, the escape hatch. The ultimate escape is to leave the country, and when high earners do that, they very likely take their businesses and their jobs and their economic dynamism with them.

We know there are lots of high earners thinking about this right now. Tyler was chatting recently to some City types, who virtually to a man were eyeing the hatch. And this morning the CBI published a poll showing that "84pc of FTSE 250 bosses surveyed said "personal taxation levels" had made the UK less attractive for investment".

Does Mr Cam understand the risk? The same Mr Cam who lived in Notting Hill and knows loads of top bosses? Surely he must do.

In which case, there really is no excuse. If we are to secure the prosperity and jobs we desperately need, "forensic focus on growth" must trump "all in this together".

****

And talking of growth, this morning's Independent front page really does underline how desperate the left are to undermine the economic recovery.

The headline was "Britain stares into the abyss again as household confidence plummets". But when you read the actual story, there was hardly even a pothole to be found, let alone an abyss. Instead, all we got was speculation that the latest official growth stats (due tomorrow) may show a slow-down from Q2's spectacular 1.2% (4.9% pa) back down to a more sustainable 0.4% (1.6% pa).  That, and some survey evidence that the property market is still pretty groggy.

Although the flimsiness of the story didn't stop the BBC giving it extensive coverage this morning.

Inferno Continues

It still seems to be alight


BOM correspondents have spotted the following ongoing money pyres:

1. British Council

The good old £0.5bn pa British Council escaped the quango cull (see this blog), and carries on torching our cash as if nothing has happened. David Blackie reports that they have just spent an unknown amount on the “style.uz” fashion week in Tashkent. As David comments:
"If the British Council sponsors a “fashion show” anywhere you might wonder whether in this age of austerity it was an appropriate use of taxpayers money. If the organisation sponsors a fashion show to demonstrate support for such a deeply oppressive regime, you know bloody well that it should do no such thing."

2. Unfunded unprivatised pensions

Nick L highlights last week's court ruling on pension guarantees for the employees of privatised state companies.

As regular BOM readers will know, when companies like BT were privatised back in the 80s, it wasn't done cleanly - HMG issued a Crown Guarantee covering the companies' accrued pension liabilities. In effect, the problem was kicked off into the long grass by ministers and civil servants who have long since retired on their own index-linked pensions. Unfortunately, what with everyone now living to 120, and the dismal performance of the stock market, those guarantees are coming home to roost big time.

The High Court has now ruled in favour of the BT pension fund trustees, saying that taxpayers are on the line for liabilities of up to £23bn. And that opens the door for a slew of other pension funds to make the same claim. Industry insiders reckon Railway Pensions, UK Coal and Trinity House, would all have strong cases. But British Gas and National Grid could also be included.

The final bill could be... what shall we say... £50 - 100bn? All because privatisation was cocked up.



3. BBC

Long-time BOM correspondent Keith M points out that the much-bewailed cut to the BBC's funding may be more apparent than real.

Yes, the BBC has lost its funding for the World Service, but if they look well about them they could recoup that - and quite possibly a great deal more - by opening the World Service to adverts.

He also points out that although the BBC is being made responsible for funding rural broadband and SC4, a large chunk of those costs are already being carried within the existing arrangements. For example, £804m  (c£134m pa) in the last settlement was earmarked for supposed digital switchover costs. And now that most people have switched, that cash is effectively available to fund the BBC's new responsibilities.

Finally, he reminds us that a 6 year freeze in the licence fee is not the same thing as a revenue freeze. The BBC will still benefit from the growth in the number of licence holders.

Roll on privatisation.


Conclusion...

What all three of these pyres highlight is that even after George's cuts, the incineration problem has most certainly not gone away.

But on the positive side, when the BBC keeps asking "what's your Plan B?", it's clear that there's still plenty of scope to cut spending further. And that includes spending on the BBC.

Sunday, October 24, 2010

Yes We Can

New Zealand has given us so much more than deeply disturbing TV ads

Maurice McTigue is a New Zealander, and was a member of that country's government as they tackled their own problems of bloated government. He has recently been talking about the experience, and his speech is well worth reading in full (HTP Peter Q). It is hugely encouraging for those of us who want the same here.

First, he explains how they managed to cut public sector employment with none of the dire consequences predicted by the Big Government doomsters:
"When we started this process with the Department of Transportation, it had 5,600 employees. When we finished, it had 53. When we started with the Forest Service, it had 17,000 employees. When we finished, it had 17. When we applied it to the Ministry of Works, it had 28,000 employees. I used to be Minister of Works, and ended up being the only employee. In the latter case, most of what the department did was construction and engineering, and there are plenty of people who can do that without government involvement.

And if you say to me, “But you killed all those jobs!”—well, that’s just not true. The government stopped employing people in those jobs, but the need for the jobs didn’t disappear. I visited some of the forestry workers some months after they’d lost their government jobs, and they were quite happy. They told me that they were now earning about three times what they used to earn—on top of which, they were surprised to learn that they could do about 60 percent more than they used to! The same lesson applies to the other jobs I mentioned."
McTigue goes on to talk about how they reformed the schools system. And given the epic and vital struggle Gove is currently having to push through his Free Schools reforms, it's worth quoting in full:

"We eliminated all of the Boards of Education in the country. Every single school came under the control of a board of trustees elected by the parents of the children at that school, and by nobody else. We gave schools a block of money based on the number of students that went to them, with no strings attached. At the same time, we told the parents that they had an absolute right to choose where their children would go to school. It is absolutely obnoxious to me that anybody would tell parents that they must send their children to a bad school. We converted 4,500 schools to this new system all on the same day.

But we went even further: We made it possible for privately owned schools to be funded in exactly the same way as publicly owned schools, giving parents the ability to spend their education dollars wherever they chose. Again, everybody predicted that there would be a major exodus of students from the public to the private schools, because the private schools showed an academic advantage of 14 to 15 percent. It didn’t happen, however, because the differential between schools disappeared in about 18-24 months. Why? Because all of a sudden teachers realized that if they lost their students, they would lose their funding; and if they lost their funding, they would lose their jobs. Eighty-five percent of our students went to public schools at the beginning of this process. That fell to only about 84 percent over the first year or so of our reforms. But three years later, 87 percent of the students were going to public schools. More importantly, we moved from being about 14 or 15 percent below our international peers to being about 14 or 15 percent above our international peers in terms of educational attainment."
Now that is radical. Not only did they go for a Big Bang reform, making all schools independent pretty well overnight, they also allowed parents to take their school vouchers and buy schooling in the private sector. Which is way beyond what Gove is contemplating.

And the result?

New Zealand schools are now firmly established as top ten performers in the international attainment league tables, comfortably beating our schools right across the board.

As the BBC and rest of the left continue their Luddite war against public sector reform, we should take heart from New Zealand. By focusing on outputs rather than inputs, and by being bold, they achieved a huge improvement in efficiency without laying waste to anything.

Yes, it can be done.

Saturday, October 23, 2010

Sorry, We Have No Money


Tyler has been reading a splendid new book by ex-Treasury advisor Warwick Lightfoot (he advised Lawson, Major and Lamont). It's called Sorry, We Have No Money, and it's right up Tyler's street.

Lightfoot picks up and amplifies all the themes we cover on BOM - that public spending has grown far too much, it's extremely wasteful, and it constitutes a serious drag on our prosperity. He documents all of this in detail, with many references to the supporting research studies.

He argues that we should cut public spending back to around 35% of GDP, roughly the level in the mid-60s. As BOM readers may recall, this chimes with the findings of previous research, showing how there is little further improvement even in so-called social policy objectives once spending increases beyond about 30% (eg see this blog, and this).

Now, 35% is a long way from where we are now (47.3%), and even after all George's cuts we'll only reach 39.8% (see this blog). What Lightfoot shows is that, despite all the pain, by 2015-16 George will only have done half the job.

The book has many interesting chapters, including one devoted to our old friend the Swedish model (and why she's not the paragon of virtue asserted by the Grun).

Tyler's favourite chapter is on the problem with our high dependency regions, something else we've blogged many times. And let's quote Lightfoot's conclusion in full:

"The heart of the UK’s regional economic problem is that individuals and communities have progressively become de-marketised over the last thirty years. If anything, public policy measures intended to mitigate social and economic deprivation have aggravated the problem. The combination of large and expanding public sector employers paying nationally agreed salaries, a national social security benefits system that destroys work incentives in generally high performing labour markets such as London, and expensive national regulatory and tax burdens makes the regions uncompetitive internally and externally. The UK public sector has ignored the role of relative prices and pursued polices that assume that simply spending public money can overcome the handicap of local labour markets where wages are not able to adjust to the productivity in the local economy. It has been plain for many years that the British economy needs greater regional pay differentials and the critical thing is to change public sector pay settlement arrangements to so that public sector pay reflects conditions in regional labour markets."

De-marketisation - spot on. We must abolish national pay rates and welfare scales pdq. And we should also note that shipping all those heavily unionised public sector jobs into the depressed regions hasn't done the local work culture any good at all. Consider Lightfoot's very striking chart on strikes:


So, the very areas where jobs are most difficult to find - Scotland, Wales, the North East - are the very areas where those lucky enough to be in work are most likely to strike. A strike record like that can only exist where the biggest employer is the public sector. And if you were a private employer looking for a new base, would you want to enter a maelstrom like that?

If you want a thorough analysis of how our obese state is crushing Britain, then this book is for you.

Thursday, October 21, 2010

TINA Does The Spending Review

The Real National Debt comes home to roost

BOM readers will be quite familiar with the Real National Debt. It's the measure of government debt that includes all those Enron items the government still manages to keep off its balance sheet (unfunded pension liabilities, PFI, Network Rail, etc etc). And as we blogged earlier this week, when you add them in, you find that the national debt is not £952bn, as officially stated yesterday, but more like £8,000bn. Which is a heart stopping £300 grand for every single British family.

But some people argue that this Real National Debt isn't real debt at all, it's way off in the future, and we can afford to ignore the problem for a decade or two.

The chart above shows why that's wrong. Because the payments arising from that debt are escalating right now. They are a serious problem for us today, not just for our unborn great grandchildren.

We put it together for today's TPA press briefing, using the government's own projections. And what it says is that by 2015-16, on top of £67bn of interest payments we'll have to make on the official national debt, taxpayers will have to stump up another £132bn simply to cover unfunded pensions and PFI payments. So the total servicing cost will be virtually £200bn - over one-quarter of all expenditure and rising fast.

It's a crucial point. And when we listen to all the squawking about George's spending cuts, we need to bear it in mind. It may well be that the cuts are "a gamble", as the pink media says, but not making them would equally be a gamble - a gamble that we can somehow find some other way of servicing our debts without triggering a 70s style meltdown in the bond and currency market. We are being offered a classic false alternative. In reality, TINA will have her way.

So what do we at the TPA make of the spending review overall?

Our briefing is here, and we can't improve on TPA Director Matt Sinclair's summary:
"It’s great news that the Government is going ahead with necessary spending cuts to get the deficit under control and that politicians are finally setting out clear plans to deal with the fiscal crisis. Many wasteful programmes are being cut and that will mean savings for taxpayers now and in the future. Unfortunately a number of measures that would save significant amounts of money while minimising the impact on services haven't been taken, like a freeze in the International Development budget or pay cuts for the best paid public sector staff. Sensible and necessary cuts have been announced today but more can be done to deliver good value for hard pressed taxpayers."
We're pleased that the government has more or less stuck with the £83bn of cuts promised in June (trimming it back only slightly to £81bn), and we're pleased to see some real detail on what goes. But there are various saving ideas the TPA and others have suggested that still haven't been taken up.

Plus of course, plans are one thing, delivery another. And delivery is going to be tough, more or less right across the board. For example, while we believe local councils should be able to deliver the level of efficiency savings implied by the 26% cut in their central government grants, they will do so only if they all emulate the flagship efficient councils like Hammersmith and Fulham (see this post).

Moreover, as pointed out in the TPA briefing, the pain of the fiscal squeeze is going to be superimposed on some other major league pains heading towards us in the current decade. In particular, we are facing the huge cost of meeting all those bonkers environmental targets set for us by our political class, which according to analysts at Citigroup will exceed £200bn.

Add it all together, and we're looking at £740bn of pain - half one year's national income:


Nobody can think this is going to be easy. And as Tyler types this in central London he can hear somebody screaming through a loudhailer out in the street - the words aren't clear, but the general thrust most certainly is.

Will we go the way of France? We were asked that this morning, and the general opinion among fellow panelists was that we're not French.

That particular proposition has been tested regularly over the last several hundred years. It looks like we're about to test it again.

PS Oh go on then. We know it's not very grown up, but God, we need something to smile about:

Wednesday, October 20, 2010

A Busy Day

A lesson we should have learned by now

Tyler is off to the TPA today to help analyse the spending announcements. So no time for a proper blog. But three quick thoughts:

1. Punching above our weight

Much talk yesterday of Cam's defence cuts stripping us of the ability to punch above our weight. Er... what ability is that exactly?

From Suez to Iraq, for the last half century we've had to follow Washington's instructions. Simple as.

And apart from that freakish 19th Century encounter down in the S Atlantic, we can't think of any modern example where we've actually benefited from this supposed punching ability (and even the benefit of holding our Falklands colony is less than clearcut). Sending our boys to die alongside the Americans ain't Tyler's idea of high weight punching.

2. BBC

Pinch me. Is this actually happening? Cam is actually downsizing the BBC? Large ones all round.

Forcing the BBC to pick up the £350m tab for the World Service is a brilliant way of making a start. But longer term we stick to our view that flogging would be better than starving (see this blog).

3. Public sector jobs

Much gaffawing at Danny Alexander's gaff of allowing photographers to snap his cuts briefing. Apparently he's let slip the shock news that 0.5 million public sector jobs are set to go.

Clearly the gaffawers (like Newsnight's Trotskyite Economics man) have forgotten that everyone already knew this. In fact 0.5m is rather less than we were previously told - during the summer the Office for Budget Responsibility forecast 700,000 government jobs losses. And of course, they also said those losses will be more than compensated for by 2m new private sector jobs (not mentioned by the Trot).

See this blog for the details, and here's the pic:

Tuesday, October 19, 2010

Cuts - Commander Bigglesworth Speaks Out


What a Fokker*

"I am a Harrier pilot and I have flown 140-odd missions in Afghanistan, and I am now potentially facing unemployment. How am I supposed to feel about that, please, sir?"

Well, that's what happens when Prime Ministers allow themselves to be addressed as Dave: any old public servant feels free to challenge their authority in public.

The thing is while we can all understand that Navy pilot's disappointment at losing his plane, those Harriers are half a century old, the money's run out, and difficult decisions simply have to be made.

As we can now see with horrible clarity, Labour left us with a total shambles on the defence front - vast budgetary overstretch, all tough decisions avoided, and multi-billion equipment orders placed almost entirely to buy Scottish and Welsh votes.

And what about those carrier orders? Contracts so loaded against taxpayers that it's now cheaper to carry on rather than cancel. Even though we do not want - and certainly cannot afford - two carriers.

And at long last we have a government with the good sense and guts to can the hopeless and appalling Nimrod programme. We've blogged it many times, including its dubious inception under Defence Secretary Portillo (see this blog).

The question now is how much have we lost? We know that the programme budget has ballooned to £3.5bn - a trebling in the per plane cost from the preposterously low initial budget - but how much of that has been spent? Our guess is all of it. £3.5bn straight down the toilet.

But though BAE has lost Nimrod, it seems to have kept plenty of other MOD work, and its shares barely moved (since the coalition came in they have roughly tracked the FTSE100). So whatever the screams, this has clearly not been a huge shock to industry insiders.

Going forward, the real issue is HTF are we going to get better procurement value? As we've blogged many times, defence procurement has been a huge money inferno ever since the government started buying bows and arrows.

Like Tyler, you may have been watching the BBC repeats of All Our Working Lives, a 1980s documentary about our traditional industries. And the one about the shipbuilding industry recounted exactly how our grotesquely inefficient shipbuilders were feather-bedded by overpriced defence contracts for decades. In the end reality had to intrude and the yards were closed, but not before taxpayers had been milked for billions.

And one other thing.

Tyler is starting to scream at the constant airtime being given to all the various special interest groups who feel they will lose from the cuts. The BBC is presenting it as a national disaster, with two hour specials and free disaster stickers (probably). But where are the winners? Where are the ordinary hardworking taxpayers (OHWTs) who will benefit from a government with the balls to take the action we must have?

Still, last night we were treated to a highly agitated Michael Crick rushing in to tell Paxo about a rumour that the BBC might be forced to pay for all those free pensioner TV licences itself. Which would effectively mean a £550m pa BBC budget cut. The poor chap looked so upset and uncomfortable we wondered if he'd perhaps wet himself. Does he think he'll be Newsnight's cut?

God, let's hope that particular cuts rumour is true.

*Footnote It may be within a life's span, but Biggles reads like another country. His very first 1932 adventure really was called The White Fokker.

Deeper - Much Deeper - In Debt

Scary

Tyler's long-promised report on the Real National Debt has finally made it to publication (download here and see TPA blog here). As BOM readers will know, the Real National Debt is the debt including all those off-balance sheet Enron items like public sector pensions, and the key points as follows:
  • At the end of 2009-10 the real national debt stood at £7.9 trillion, over £300,000 for every single household in Britain
  • During the last decade debt has more than tripled, soaring from 230 per cent of GDP (£2.3 trillion) up to 560 per cent of GDP (£7.9 trillion)
  • Official national debt (quoted by the Chancellor in his budget) hugely underestimates taxpayer liabilities
  • Relative to GDP this is by far the biggest national debt we have ever had since records began
And here's the summary chart with the accompanying key:


As that crotchety old guy on the accompanying vid* reminds us, it's pretty scary stuff.

Well, that is to say, you and I think it's pretty scary. Amazingly, despite the scale of these figures, there are still those who argue that we needn’t worry too much. They argue that we can take time to address the problem, something is bound to turn up when the economy recovers, and that anyway most of this debt isn’t real, like say credit card debt.

In tough times that's a very seductive line, so we need to be clear why it’s wrong.

First, these debts are much more than a few dry entries in some dusty accounting ledger. They represent a real commitment on taxpayers to make real payments in future years.

And lest anyone imagine those payments won’t come due for ages, and that we can safely shrug and leave the pain to our grandchildren, it’s important to understand that annual servicing costs are already increasing alarmingly. By the middle of this present decade the annual cost of debt interest plus pension payments plus other debt servicing will be approaching £200 billion, or £8000 per annum for every family (see this blog).

Second, although economic growth will certainly help ease the strain, the rapidly mounting cost of debt servicing means that we will need a high growth rate just to keep our heads above water. Unfortunately, from where we are today a sustained period of high growth doesn’t look very likely.

Third, pension liabilities are just as much debt as government borrowing in the bond market. For sure, the government could renege on its accumulated obligations to pensioners, just as it could default on its market debt. But there would be consequences (cf La Belle France), and the present government shows no signs of doing so. On the contrary, it has promised to re-link the basic state pension to average earnings.

Finally, while it is true that our nationalised banks have assets to back their debts, nobody can be sure quite how much those assets are actually worth. Taxpayers are effectively on the line for the full amount of the debt, and should not assume they can rely on the banks’ assets for support (as Irish taxpayers have recently discovered).

A real National Debt of six times our annual income is insupportable. It represents a mounting burden on taxpayers for years to come, and a colossal drag on future economic growth. In one way or another, government must reduce it.

Which is why Wednesday’s spending announcements are so important. We need to see a convincing plan for delivering the fiscal restraint promised in June’s Emergency Budget.

But that is only the start.

Spending needs to be held down for at least a decade, so that the annual budget deficit becomes an annual surplus, and we start to pay down the debt – we are still a long way from that.

As we've blogged many times, we need to flog our nationalised banks soonest.

And in addition, there needs to be a much more fundamental reform of government pensions, both public sector and state. With life expectancy increasing in leaps and bounds, the age at which people can draw their pension has to be increased soon, almost certainly to 70.

*Footnote. Yes, there is a vid featuring some old bloke Tyler doesn't recognise. But for the record, here it is:

Monday, October 18, 2010

So What Happened To Those 25% Cuts?


It turns out she had it easy

As we blogged over the weekend, the noises off suggest that all that macho talk of 25% spending cuts was way off the mark.

We learned in June that George's cuts were never going to deliver more than a 4% overall reduction in real-terms spending over 5 years (ie a 9% increase in cash spend against 13% projected inflation). And although the ill-advised ringfence around the NHS and overseas aid budgets suggested that cuts in other departments might still be much higher, it now seems that even those cuts have been trimmed back. The big spending departments seem to have diverted any real pain into the welfare area.

Can that be right?

Sure, we know the difficulties. We know that even Mrs T never actually managed to cut overall spending - she only managed to restrain its growth.

But Mrs T was not wrestling with the kind of horrific government deficits and debt we currently face. Even in the annus horribilis of 1980-81, public sector net borrowing was only 4.8% of GDP, with public sector net debt a mere 46%. Compare her stroll in the park with our current predicament, where we have government borrowing over 10% of GDP, and debt already through 60% and rising fast.

In the circs, you have to wonder why we're not sticking with the original idea of 25% cuts. Surely after those huge budget increases under Brown, all departments must have a great wobbling midriff of blubber just crying out for emergency liposuction. 

Now a helpful new report from Policy Exchange gives us a fix on that blubber, at least in a subset of the spending departments.

Policy Exchange examined spending in six non-ringfenced departments to see how easy it would be to make overall 25% cuts without damaging vital services. And it turns out it would be dead easy, or in the words of lead author Andrew Lilico:
“From our report, a natural conclusion to draw is that it would be relatively straightforward to achieve savings of around 25% across most departments. Indeed, it is perhaps surprising that there is so much ‘fat’ in the system that cuts on this scale can really be made in so many areas so straightforwardly."
Which in terms of spending cuts is rather encouraging.

But the report also makes the very good point that it would be even easier to make cuts without damaging services if the ringfenced areas were also made to take their share. PolEx's head Neil O'Brien says:
“There is a lot of waste and unproductive activity in the areas we examined. Yet these are not the areas which have seen the largest increases in spending in recent years. In the areas where there was a real flash flood of spending we might expect even greater potential to make effective savings.”
The overall conclusion is familiar in the sense that it would have been a lot better not to have set up those ringfences in the first place. But by looking at specific areas in detail, this report tells us the ringfenced areas offer a deal of scope for Cuts II, sometime around 2013.

PS Tomorrow Tyler's long promised report on the Real National Debt hits the newsstands... well, it comes out, anyway, and we'll take a look at the main findings.

Saturday, October 16, 2010

Shrinking Shears

We thought we'd moved on from these

So let's see if we've got this right.

The defence budget - intitially slated for a 25% cut - is now apparently only going to lose 7-8%.

The schools budget - intitially slated to share in education's 25% cut - is now to be preserved at current spending levels in real terms.

The quango bonfire turned out to be a damp barbecue.

There's £7bn extra cash to fund early years help for poor kids. And in all likelihood further "good news" spending commitments to come out between now and Wednesday.

Plus of course, the huge NHS budget is ringfenced to keep all Labour's planned growth, as is the overseas aid budget.

All told, that's starting to sound like an awful lot of backsliding in the cuts department. Are these cuts actually going to come anywhere near what we need?

Let's remind ourselves of the big picture.

Back in his June Budget, George announced that total public spending (TME) would be brought down from this year's 47.3% of GDP to 39.8% by 2015-16. That's a cut of 7.5 percentage points of GDP, which is massive. It's a substantially bigger reduction than the 4 percentage points Thatcher/Howe achieved in the five years after the early 80's recession. And in fact the only time anything like that has ever been achieved in peacetime was during the Lawson boom in the late 80s - a repeat of which does not look altogether likely over the next 5 years.

But here's the really striking thing, despite the sharp projected fall in spending as a percentage of GDP, George's budget didn't incorporate any actual overall spending cut at all. In fact, total spending in 2015-16 was projected to be 9% higher than this year.

In reality, all George was doing was to hold the growth of spending below the projected growth of GDP. Indeed, Tyler's fag packet says that had he frozen spending, then by 2015-16 projected growth in GDP would have reduced the spending percentage to a mere 36.6% of GDP, rather than the 39.8% he's actually planning.

OK it's true, a freeze in cash spending would almost certainly entail a cut in real spending, given the projected rise in prices. But as Tim Morgan shows in a useful new paper for the Centre for Policy Studies, even taking account of projected inflation, George's overall spending plans (the so-called "spending envelope") will still only deliver a minimal real-terms cut. In fact, Morgan calculates that even after five years of supposedly hard pounding, spending in real terms will still only have retreated back to last year's level:


Let's just pause to reflect on this.

What we're saying is that public spending - even in real inflation-adjusted terms - is not planned to fall by very much at all. In terms of reducing its share of national income, most of the heavy lifting is done by the projected growth in that income. Growth that is put at an average 2.7% pa over the next five years.

Hmmm.

Sound familiar?

It's almost like that Shadow Chancellor who used to go on about sharing the proceeds of growth. The one who kept on about it right up until the moment the economy fell over that cliff.

What we really need to understand is that if we don't get 2.7% pa growth over the next 5 years, things could get rather awkward. Not only would the current plan not deliver anything like the 7.5 percentage point drop in spending's GDP share, the lower growth would itself push spending higher via its effect on welfare payments.

Conclusion?

Despite all the screams and waving of bloody stumps we'll be subjected to this week, these cuts overall are pretty modest (and see this by George Trefgarne). The real trouble is that for transparently obvious political reasons, George and Cam have ringfenced a number of chunky areas like the NHS, thus making the pain in other areas that much greater.

From what we hear, a lot of that pain will now fall on welfare payments. Which is fine, inasmuch as it accounts for more than a quarter of all public spending, it has grown hugely under Labour, and working age benefits have to be cut to incentivise work.

But what worries us is that the detail of these welfare cuts does not seem to have been thought through. As we saw with the Child Benefit announcement, it's one thing to agree a change during a late-night sofa session with Dave and George, but it's quite another to force through implementation when the practical details haven't been sorted. There is a very real risk of backsliding.

Everybody knows cutting is difficult. Everybody knew it was going to be difficult this time.

But given that the overall cuts total is considerably less ambitious than the BBC and the rest of the left would have you believe, let's just hope that George has got some hard detail to announce on Wednesday.

PS The late volte face on defence spending sounds like another worrying example of sofa government. Mr Cam apparently intervened personally to over-rule the Treasury and soften the impending cuts. Not only was Cam nobbled by the Defence Chiefs - who naturally want no defence cuts - but it seems very likely he got a personal ear-bashing from Hillary. No doubt she would have told him that while she herself is a great Anglophile and defender of the Special Relationship, she's surrounded by people who have never forgiven  the War of 1812, and who are sick of propping us up militarily. Unless Cam rescinded part of the cuts, he could kiss goodbye to joint press conferences with St O on the red carpet, plus those shiny new nukes we've ordered. But let's recall that after the US, we are NATO's second highest defence spender (well, OK, Greece is higher, but we hardly want to go there). According to the official NATO stats, we currently spend 2.7% of GDP on defence (2009), double Germany's 1.4%. Even France - La Gloire herself - only spends 2.1%. So WTF? Why should we continue to shoulder a higher burden, when others are allowed to get away with much less? Tyler yields to nobody in his admiration for the dedication and courage of our services, but there's something seriously out of whack here. Over the entire 65 years since WW2, British taxpayers have shouldered a wholly disproportionate burden in defence of the West. As Ted Bromund's very helpful long-term chart shows (see this blog), for most of the post-War period we spent between 5% and 10% on defence - money the Germans, say, were able to invest in wealth producing infrastrucure and capital equipment:

Sofa spending decisions are no substitute for a fundamental reappraisal of why exactly we're doing all this.

Friday, October 15, 2010

Lessons From A Damp Barbecue

Are we having fun yet?

Less a bonfire, more a damp barbecue. There is widespread disappointment that yesterday's cull of the quangos wasn't nearly as decisive as originally billed.

In summary, out of 901 quangos reviewed, 380 will remain entirely unchanged, with a further 40 still undecided (ie too difficult to close). On top of that, another 171 will be retained but "substantially reformed", and a further 57 new ones formed from mergers. Overall, out of the original 901, we will still be left with 648. And even among those that are going, many of the functions and staff will simply transfer back to their sponsoring departments.

So was the whole exercise a waste of time?

No, that would be too gloomy. Some of BOM's all-time favourites are definitely going - eg the Audit Commission, the Regional Development Agencies, and the Qualifications and Curriculum Authority. Some praise is certainly due.

But many other old favourites survive. The notoriously profligate British Council survives, as does, ahem, "public service broadcaster" C4.

And those mergers are a worry. We recall what happened to the much mocked Potato Marketing Council (the quango responsible for National Chip Week - see this blog). By 2008 it had become such an embarrassment that Labour merged it into the £50m pa Agriculture and Horticulture Development Board (AHDB). And as far as anyone can see, it's still there, taxing the potato industry £6m pa to fund its half-baked campaigns for more oven chips.

The fundamental point is this: rearranging bureaucratic deckchairs will never save much money. Simply switching the name plates on the front doors will not do it.

What Cam's government has to do is to axe functions. That's the way to save real money.

Take the British Council. It spends an eye-popping half billion per annum on all manner of bizarre cultural enterprises in the far flung corners of the world (of which £250m comes direct from general taxation), and yet nobody has ever been able to show we get value from it. Let's close it altogether and see what happens.

More broadly, as we've blogged before, there are basically only two ways of cutting public spending.

The first is known as "starving the beast". That involves the beastmaster (aka the Chancellor) cutting a fat beast's food budget and hoping that the thing will get itself in shape. That it will make economies by cutting down on cream cakes and other luxuries, and spending its smaller budget on stuff that's really needed. Like broccoli and oily fish.

Beast starving undoubtedly has a role in budget control, especially when prolonged control is required - as now. But the problem with fat beasts is that they may not like broccoli and oily fish. They may go on buying the same old cream cakes and oven chips and end up slumped on the sofa in front of daytime TV and no use to anyone...

Hmm... another metaphor that's spun away from us. The key point is that simply cutting budgets from the top without specifying what functions are being cut risks a serious degradation of frontline services across the board. In a public sector without customer choice and the pressure of competition, leaving the decisions entirely to frontline managers is likely to result in worse services to us, the helpless victims.

Which is why when George announces his long-awaited spending review next week, we must hope we get some chapter and verse. We need to know not just the departmental spending allocations, but also the functions that are being scrapped or privatised.

Wednesday, October 13, 2010

University Finance Sorted

Time to break out the port?

As long-time readers may recall, Tyler was never Mr Cam's biggest fan*. But this government is showing a degree of can-do radicalism that is starting to make even Mrs T's initial steps look timid (let alone the spineless foot-dragging of vacuous fantasy reformer Bliar).

In five whirlwind months they've gripped the fiscal crisis, pushed through their promised free schools reform, launched an untrailed but fundamental market-orientated restructuring of the NHS, faced down the Luddites in the police force, announced a revolution in welfare, and signed death warrants on hundreds of useless and unaccountable quangos. There's more, but space is limited.

Yesterday they announced the much needed reform of university finance. Lord Browne's excellent report cuts straight through the BS. His recommendations manage to combine proper funding for the unis, with affordability, with competitive pressure, with... well, to coin a phrase... fairness for all (especially taxpayers). So hurrah.

We've blogged the shambolic state of higher education many times (see all previous blogs gathered here). In summary:

  • Taxpayers now spend £12bn pa on higher education, up around 50% in real terms since 1997; the students themselves spend a whole lot more.
  • There are 2.3m students, or 4% of the entire population (including 27,000 doing the Major's favourite, the degree in media studies).
  • The 50% participation target is "aspirational" - ie entirely arbitrary (admitted to the PAC by the Chief Executive of the Higher Education Funding Council for England - see this blog).
  • The average HE participation rate across the OECD is 35%: ours is already 40% and heading for 50%
  • Courses have been dumbed down and grading standards slashed - the proportion gaining first class degrees has nearly doubled under Labour ( see this blog)
  • Thousands of graduates now do non-graduate jobs, and that number is growing rapidly- their M Mouse degrees have simply not equipped them to do anything else (according to HESA, 75% - yes, 75% - of 2002-3 graduates were still in non-traditional graduate jobs four years after graduation; what's more, 26% weren't in full-time jobs of any kind; and see this blog)
  • The average financial return to a degree is plummeting - according to PWC, the gross return to an Arts degree is now only about £30 grand, and that takes no account of the costs of study and the earnings foregone - net net an average Arts degree almost certainly reduces lifetime wealth.
Now, it's on that last point - the financial return to a degree - that Labour misled us most egregiously. Back in 2008 we attended a meeting of the Public Accounts Committee (under its previous esteemed chairman), where Bliar's claim that a degree was worth an average £400 grand was brutally exposed for the fabrication it was. And the Browne Report gives us some chapter and verse on just how the number was cooked up (see Report footnote 11).

Apparently the £400 grand referred not to the value of a degree per se, but to the value of a degree plus all other education beyond the average, which would certainly include A Levels. That is a gross deception, especially when you remember that all reputable research in this area has always and correctly calculated the value of a degree as being the difference between what you earn with A Levels alone and what you earn with a degree (and Tyler does actually know about this, having researched the area for the old Department of Education back in the 70s).

Browne wisely takes his estimate of a degree's value not from HMG or the unis but from the OECD. And they reckon that the lifetime value to a male graduate in the UK is currently running at just over $200,000, or about £120 grand (note that the OECD's calcs are published in purchasing power parity dolllars). Here's Browne's summary chart (click on image to enlarge):


So there is a financial return overall, which is not to be sniffed at (although note that the return for female grads is estimated by the OECD to be 25% lower).

However, there are some very important points to note here:
  1. These estimates are based on the lifetime earnings of previous graduates, the ones who got their degrees long before the explosion in graduate numbers and M Mouse degrees. The returns looking forward are almost certainly going to be lower.
  2. Brown quotes only the returns to the grads themselves. As taxpayers, what we need to know about are the returns to us. What do we get out of the muti-billion subsidy we currently provide?
And even though the report doesn't spell it out, that second point lies at the heart of the Browne reforms. In future, our unis will be funded much more by the fees they can earn from their students, and those fees will be financed not by taxpayers but by the students themseleves, via higher student loans. Which is exactly as it should be.

Because not only are the students the principal beneficiaries of their degrees, but by forcing students to think seriously about the value of a degree, we will force the suppliers to deliver that value far more effectively than any number of quango funding councils (in case you don't know, this is called the market).

Poor students being put off?

Well, at the margin you might worry about that. But as Browne was pointing out all yesterday, a university education will still be free at the point of use. And there will be no credit check on first time students applying for a loan. What's more, graduates who earn less than £21 grand pa (indexed against average earnings), will not have to pay anything.

Education is about more than cold hard cash?

Well, yes, it is. And Tyler is a big fan of the so-called "non-pecuniary benefits".

But by the time we get to degree level (ie assuming we've already taught everyone the 3Rs and a bit of shared science and culture), most of those wider benefits again accrue to the individual.

So we think the Browne reforms are spot on. Congratulations to him and his team.

And to St Vince for having the balls to accept reality.

PS Yes, yes, hypocrisy. Tyler got not one, but two free degrees, from not one but two top Russell unis. How can he now kick the ladder away? Well, (a) a much smaller percentage of pupils went to unis in those days so the taxpayer bill was much less, (b) Tyler has since paid sick-making amounts of tax that would probably have funded several entire lifetimes at uni, (c) Tyler does make voluntary contributions to both his two unis. Apart from that, you do have a point. In truth, the taxpayer should never have funded uni education, other than through loan provision.

*Footnote While Tyler was never Mr Cam's greatest fan, Mrs T (T as in Tyler, that is) always was. She backed him from the very first time she heard him speak back in 2005. And she now greets each new brilliant radical announcement with a triumphant "that's my boy". Very irritating.

Monday, October 11, 2010

Simple Shopper To Go Green?

I could do you 200 dozen, trade

Regular BOM readers will be all too familiar with the Simple Shopper and his staggering ability to burn our cash (see previous blogs gathered here). But Cam's procurement guru Sir Philip Green has clearly been rocked by what he's seen of the Shopper's operations:
"The process is shocking. There's no reporting, there's no accountability... You could not be in business if you operated like this. It would be impossible."
His report is refreshingly brief and punchy - very unlike the usual telephone directory reports we get from officialdom (see PS below). Among the real shockers he highlights:
  • £2bn pa spent on landline telephony, where the Shopper is overpaying by an astonishing £600 - £700m every single year
  • 400,000 hotel rooms booked every year in central London alone - Green estimates £50m pa could be saved by teleconferencing
  • £800 laptops bought for £2000 each
  • £20m lost on failure to break expensive central London lease - government property costs £25bn pa, but has not been managed on a commercial basis (especially taking opportunities to break expensive leases)
  • Failure to exploit HMG's AAA credit rating - a commercial operation with such a rating would insist its suppliers extend lengthy credit facilities (aka paying invoices later).
Green declines to give a figure for the total possible savings, but with the total procurement spend getting on for £200bn pa, we're clearly talking tens of billions annually. Savings that would go a very long way to closing George's fiscal gap.

So WTF hasn't it been done already?

After all, governments overpaying on procurement has been a problem for at least four centuries (see this blog for what Charles II's Clerk to the Navy Board - a certain Mr Pepys - had to say about it). And the Great Helmsman used to bang on all the time about how much his brilliant procurement reforms had saved us.

Sir Philip suggests it's because government buying is too fragmented - scores of different departments and quangos buying their own paperclips and not capitalising on their combined buying power. What we need is centralised buying in the hands of hard-nosed professionals such as... well, such as Sir Philip.

Yes, nice idea. So logical.

Except... hang on a minute... isn't centralised buying precisely what was supposed to have happened under the G Helmsman? Didn't he set up the Office for Government Commerce under the direction of hard-nosed (and expensive) professionals, specifically to wring better prices out of suppliers by exploiting scale?

Well, yes he did.

And yes, it flopped.

You see, what Sir Philip has failed to understand is that once you set foot in Whitehall, you aren't in Kansas any more. You no longer have people around you who are driven by the cost imperative. Instead, you have people who are driven by the need to defend territory, and to keep the politicos off their back.

Just what that means in practice was neatly highlighted by one of those politicians, responding to Sir Philip's report today. Margaret Hodge is the new chairman of the Public Accounts Committee - the grand-daddy of Parliamentary watchdogs and the very body set up by William Ewart G to ensure taxpayers get good value from public spending. And her response to Phil's report was to say he doesn't know what he's talking about - government is much more complex than running Topshop. Even for the Public Accounts Committee, it's clear that cutting costs is not the over-riding priority.

The fundamental problem here is that government does not do cost efficiency - never has and almost certainly never will. And the reason is very simple - unlike Topshop, the "customers" of government have no choice. Yes, of course they can replace the non-execs every so often, but there is no other shop just along the High Street they can simply take their business to.

So government isn't under the same pressure as Topshop to deliver value for money. Not the same pressure to screw their suppliers down to the last penny. So even where you have centralised buying - as for example in defence equipment - because the pressure isn't there, you never get the cost saving the private sector takes as a matter of course.

No, the only real cure for all the billions government wastes in its procurement programmes is not to coordinate purchasing programmes, but to stop government procuring stuff at all.

In other words to break it up. To downsize government drastically, and return many of its current functions (like education and healthcare) back to the private sector.


PS Today's Fairness report from the Equality and Human Rights Commission is in sharp contrast to Green's snappy offering. It weighs in at a totally unreadable 750 pages, with further vast research appendices on top of that. As always, Tyler has only looked at the pictures, and we may blog one or two of them in due course. But for now, let's just note Commission head Trevor Philips' latest suggestion for government action - to redress the unfair distribution of "moral and social capital". No, we don't know how government could do that either. Outside of North Korea, that is.