Balance Sheet Accounting for the UK economy

The true health of the economy is not to be judged by the growth rates, nor the state of the government’s finances on the size of the annual deficit, nor upon the balance of payments. It is upon the state of the balance sheet.

 

In simple terms, a balance sheet consists of liabilities and assets.

 

Liabilities – examples

 

  1. The National Debt £800bn
  2. The Final Salary Pension of public sector employees £1,000bn
  3. State Pension and disability benefits       say £1,000bn
  4. NPV of PFI schemes
  5. Maintenance of exiting assets, e.g. NPV of maintaining buildings and roads in their current state.
  6. Commitments, such as increasing the school leaving age to 18, emissions reductions, or the cost of reducing poverty. 

 

Assets

 

            This is not the actual assets that a government holds – the land and buildings at market rates, the cost of computer equipment. For a business these are assets, as they will provide future returns, but for a government they are the means of carrying services. The major asset is the future tax revenues. The government’s asset is the future capacity of the general public to pay tax.

 

It may not be possible to get a full balance sheet, and any conclusions will be contentious. But from year to year, it will be slightly easier to look at the change in the balance sheet from year to year. Such an approach will be a focus for debate, and move politicians away from short-term expediency and towards long-term stewardship of the Nation’s finances.

Labour Loses Ipswich by-election?

This morning on BBC1 Breakfast programme Emily Thornberry MP acted as the Labour Party spokesperson for their crushing defeat in the Norwich North by-election.

Repeatedly she mentioned the IPSWICH by-election. This is despite having been in Norwich two days previously.

This is the same MP who would like women MP’s to be taken more seriously? If that is the case, then the Labour party should keep her off the airwaves.

(Feature was at 8.05am)

Labour’s aim to save £35bn

According to John Redwood, the Labour Government has plans to save £35bn a year. I posted the following comment.

 

 It is good news that the government is allowing for value for money as a consideration. But after twelve years of government, it is a bit late.

 A bit of quick beancounting might put this into perpective. If these are mostly savings they could have made earlier, and assuming they have always been a constant percentage of government spend, then labour’s delay has cost the  taxpayer around £325bn. If it has only built up since the spending hikes in 2001, the figure reduces to £150bn. However, for the government to admit this lower figure would be to admit that a large part of the spending increase was money down the drain.

 Another way of looking at the £35bn is to divide by the number of Labour MPs. It is nearly £100m per MP. As I have blogged before, this level makes the financial amounts of MPs expenses seem trivial.

 But even this annual £35bn only scratches the surface between the best value that can be theoretically achieved and the situation now. There is a lack of dynamism in government in changing service provision to the changing requirements; a lack of expertise in matching real individual (or local) needs to the money available; and a total lack of thought in relating costs to benefits for new initiatives. Add to the mix the strong interest groups in protecting the status quo, and many statutory encumbrances that add little value but a lot of grief, and you have the opportunity to spend a lot less, whilst improving the welfare of society as a whole.

 

To enlarge on why the scope for savings is much larger

 

1)      Much of the government services provided, whether education, health care or welfare payments are based upon a uniform specification. In education, there might be too much spent on some pupils, so that a very small minority will be missed out. The same goes for disability or housing benefit.

2)      Initiatives that flounder. Whether it is the drug addiction schemes that are less than 5% effective or the computer schemes that deliver many times over budget, years late and without the benefits specified.

3)      Lack of marginal analysis. A new initiative will look at the supposed benefits, but not the costs. For instance raising taxes on alcohol, tobacco and fuel may all have the desired results of reducing consumption, but the biggest impact is the reduction in living standards of those whose spend increases on these items. Last year I wrote extensively on the proposed congestion charge in Manchester. My major objection was the same issue. A low charge will be mostly absorbed by the motorists. Only a high charge will cause the majority to switch to public transport.

4)      Ignoring unintended consequences. The smoking ban in public places has triggered a massive decline in the number of pubs. The raiding of pension funds by Gordon Brown has contributed to the decline in final salary schemes. Avoiding recessions after the dot.com bubble burst in 2000 and after 9/11 mean that the boom was prolonged, causing greater grief when the boom finally ended. Doing “whatever it takes” to save the banking system, meant that the exchequer took on hundreds of billions liabilities that may result in massively increasing the National Debt.

5)      Ideological or political appearances. Whether it is “bobbies on the beat” or investing in renewables to meet climate change targets, costs are incurred for public relations, rather than to have any obvious effect. The excessive increases to doctors and nurses in recent years has added billions to the NHS wage bill.

6)      Lack of Expertise in cost negotiation. The government this month signed a £6.5bn PFI deal to widen 38 miles of the M25. In 2004 it was to be £4.6bn for 63 miles.

 

Another attempt at understanding cost control in government was here, where I applied the principals used in my weekly shopping to the issue.

Child Poverty Bill – Another Labour Poison Pill?

Yesterday the government put forward the Child Poverty Bill, with mandatory targets for reducing poverty.  It is utter folly.

For those that really care about helping the poorest, meeting a particular target is not the way to go about it. It is fairly easy (and relatively cheap) to get a large number just below the poverty line to move just above it.  

 

However, people should consider the following.

 

1. The Measure is in relation to Median Income.

 It is not about actual living standards (how much you can buy with the income), but a relative measure compared with the median income. But at the same time the government’s environmental policies are lowering living standards – by pushing up fuel bills in the future and food bills (through the competition from bio-fuels). The poor (who spend larger proportions of their incomes on these items) are seeing their living standards fall, even though their “real” incomes might be rising and income inequality decreasing.

Further, if indirect taxes are increased (VAT, excise duties on alcohol and tobacco), then this will again fall disproportionately on the poor. Taxes will need to increase to reduce the deficit, and VAT is a good candidate.

 

2. Standard of life is more important than standard of living.

However, there is something much worse. The more government determines the income of people, the less control people have for influencing their own lives. In trying to eliminate material poverty, government will foster hopelessness. During the Euro-elections, Channel 4 did a survey of how people voted, concentrating on BNP voters. A distinguishing feature was that

 “Just 19 per cent of BNP voters are “confident that my family will have the opportunities to prosper in the years ahead”. This compares with 59 per cent of Labour voters, 47 per cent of Lib Dem and Green voters, and 42 per cent of Conservative voters.”

 

So a poison-pill policy directed at a future Tory government may help enlarge the disaffected underclass. Another example of Labour preparing for opposition.

 

 

More analysis can be found at http://manicbeancounter.wordpress.com/2009/06/10/giving-the-bnp-voters-a-message-of-hope/

And http://www.channel4.com/news/articles/politics/domestic_politics/who+voted+bnp+and+why/3200557

When Strong Politics incites the Thugs

The Huffington Post reports on another killing of a critic of the Russian Regime

Award-winning Russian rights activist Natalya Estemirova has been found dead hours after being kidnapped in Chechnya, reports Human Rights Watch.

Estemirova’s body was found on a roadside near the Chechan border with two bullet wounds to her head, according to the local Interior Ministry spokeswoman.

I do not believe that the Russian Government authourised this, any more than they ordered the deaths of numerous others journalists and human rights activists that have been  murdered over the years. (Please see list below from the Huffington Post Article). Nor do I believe that some leader mutters some comment like Henry II referring to the Thomas a Beckett in 1170 saying “What sluggards, what cowards have I brought up in my court, who care nothing for their allegiance to their lord. Who will rid me of this meddlesome priest.”  (Although there is nothing like the penitence of that monarch expressed after the deed was carried out after the event either)

Rather, it is a more lowly scale. An assertive government, who believes that they are acting for the good of the nation, and confident that they are right, will pass on that belief to their supporters. Some of these supporters, acting anonymously, will have a slightly less scruples & no political acumen.

In the UK, there is a slightly more moderate party that craves for power. The leadership will never call for violence against those who thay oppose, but may inspire others of a more extremist vain to support violent acts.  In the UK (the home of Liberal Democracy), they will remain a minority so long as people remember their heritage and believe in it. The problem with Russia is their history. The current leadership are the children of the survivors. Those who survived by keeping their heads down and agreeing. The children of those who accepted that the state was all-powerful and the individual was a cog in that machine.
Russia will continue to be a miserable place until the leadership can learn from Henry II. They need to learn pennance and the need for openess and for dissent. It will take more courage than unarmed combat with a tigers, but not more than the courage of true men who believe in making their country great.

Alternative details on the BBC.

Vyacheslav Yaroshenko,

Magomed Yevloyev,

Anna Politkovskaya,

Telman Alishayev

Stanislav Markelov

Anastasia Barburova

Getting Swine Flu in Perspective

Dan Hannan posted yesterday on the Swine Flu Pandemic.

The swine flu outbreak consists of the following

- a fast-spreading virus, that in the vast majority of people causes a fairly mild and short illness.

- The mortality rates are extremely low, and usually are to people in a very poor state of health. The group most vulnerable – the elderly – seem to be immune.

- There is a very small risk of the swine flu mutating into something more deadly, but as yet this has not happened.

The consequence of this – the government is spending huge amounts of money they do not have, simply to damp down talk that they are not doing enough. The scare stories are started by drug companies, keen to see a profit opportunity.

This is clearly a situation where the costs of action far outweigh the benefits. The more reasonable course of telling folks to stock up on Lemsips (or Beechams Powders) and if they suspect they have the flu to stay at home.  The major effort should be put into monitering and the sensible advice currently been put out.

There are similar panics where the proposed cost of solutions far outweigh the benefits

- The expenditure on track and signals following rail disasters.

- The reaction to the credit crunch (we must do whatever it takes)

- The combatting of Global Warming with expensive schemes, with little impact.

The ways to avoid such waste is to first assess the situation, then devise a proportionate (and cost-effective) response. The failing with our current way of working is that the public’s perception is more highly prized than good stewardship of our valuable resources.

UPDATE 15th July

Nadine Dorries has a similar post today -

 “I was also struck by the protestations of those who claimed that the true picture of the swine flu outbreak can not be truly known, as many people are not seeking medical help and therefore we need some form of large scale testing to obtain a true picture of the scale of the outbreak. The inference being that on the contrary, this is not something simply as mild as seasonal flu, it’s much worse?!

Er, no, surely not? The reason why people aren’t seeking medical help is because in the vast majority of cases, the symptoms are so mild that they don’t need to,  possibly tipping the scales well over to the point of fact that swine flu is demonstrably milder that seasonal flu and in most cases as severe as a mild cold.”

UPDATE 2 15th July

John Rewood makes comment in “One Flu out of the Cuckoo’s Nest”

So far I have avoided comment on the great pandemic.

In the early days Ministers and government told us they were valiantly combatting it, to stop it reaching us. I bit my tongue. It reached the UK.

Then Ministers told us they would stop it spreading in the UK. I kept quiet. It spread.

Government implied it was virulent and serious. They would fight it in the hospitals and in surgeries, with huge quantities of drugs. Fortunately so far it has proved quite mild for most people catching it, unless they already have some other serious condition.

Now we are told flu is flu. This one is like regular flu. You may not need drugs at all, or if you do a phone call to the GP should suffice to sort it out.

So all we have is a lot of wasted money, a profitable bonanza for the drug companies and undue worry for those infected, or being close to those infected. Another example of the true cost of Politics.

 

Regulation that only harms the honest

Burning out money has a post on the hurdles to open a new savings account. Introduced to help prevent money laundering, it

“there is not a single case of any would-be launderer being caught by this system. As you’d kinda guess, real launderers are quite capable of cobbling together the necessary fake docs, and ticking all the right boxes.”

Like with government expenditure, in regulation, the areas be scrapped are those where government activity does net harm to society. This anti-laundering legislation looks to be one of them.

Turning MPs into Administrators

According to the Sunday Times, there is a proposal to cut the salaries of MPs with outside interests. This flows from a view that time spent equals output. Modern Britain has moved in the opposite direction.

 Who do you think should be paid more?

 

  1. A GP who handles 50 patients a day, one who handles 40 patients a day. The second is much better at diagnosis of cancer, so survival rates of their patients are significantly better than the first.
  2. A fireman who puts in enormous effort in public awareness campaigns, (but does not act like taking risks), or the fireman who much prefers maintaining the equipment and pumping, but has received bravery awards for rescues.
  3. A credit controller who spends 60 hours a week chasing payments and sorting issues, or one who spends most of their 35 hours making personal calls. The former has some bad debts, and a high percentage of overdues. The latter is so efficient, that potential bad debts are spotted early, and if the account falls a day over due, the customer knows they will get a call.
  4. A hands-on salesmen who spends 80 hours a week at clients premises or travelling, generating £200k a year of net profit from 500 orders, or the salesmen who spends most of the time on the local golf course with his mates, two of whom regularly push orders his way adding the same £200k a year to net profit. In the former case, it is for a market-leading product. For the latter, there is competition from much stronger competitors.
  5. The managing director working long hours, effectively running the business on a day-to-day basis, but not thinking strategically. Or half-a-day a week part-time director who can identify important strategic opportunities and accurately forecast business risks. As a result of the second, the business grows during a recession, whilst competitors down-size or go bust.
  6. The drugs researcher who assiduously works throughout a long career, is popular & provides copious and well-written reports, but of little value. Or the wonder-kid who finds a block-buster drugs at ages 30 and 55, is a pain to work for, and their reports poorly written and often late.   

 

If you support “part-time” MPs being paid less, then I suggest that you support the first type of person. If you believe that MPs are there to make a difference, it is the latter. Further, I would suggest that such a move is the opposite of the direction that society is moving. In the wider world jobs have moved away from where volume and time spent are the measure of output. Increasingly it is the single actions, or a flash of insight, or just a small amount of time spent that creates most of the value. That is in the creative industries (research, advertising, design) or in education or health care or accountancy or even in manufacturing. The repetitive jobs have been eliminated by computers, or have moved to developing countries.

 

Other objections.

 

  1. If quantity of output is important, what of the MP who spends most of the time in the common’s bar? – or campaigning in other constituencies?
  2. What of the MPs who are also councillor’s or MEP’s. A councilor signs to work 20 hours per week minimum, so should an MP’s salary be worth less.
  3. The idea that MPs should be paid (partly) by the number of attendances was rejected. Is this not introducing this idea in another way.
  4. If time spent is important, should an efficient MP be paid less than an inefficient one (doing the same volume of work)?
  5. The biggest source of outside interests is government ministers. Should not the Prime Minister have a lower MP’s salary, or other member’s of the government.

 

It is one more thing to drive out the “elected representatives—citizen legislators replacing them with “professional politicians funded exclusively by the taxpayer

 

UPDATE – Douglas Carswell has a witty comment on the professionalisation of MPs

Getting Value on UK Govt Procurement

A way to save on the cost of government is to re-think our procurement strategies. This post is an enlargement a comment made on John Redwood’s posting “The Future of Trident”. I therefore start from the aspect of defence procurement.

 1)      Specialist specifications rather than adaptation of exisitng civilian (or foreign military) designs. (Communications technology is a case in point.)

2)      Inadequate specification at the outset, or changes to the specification part way through. (Numerous IT projects provide better examples).

3)      Changing the organisation to suit the equipment, rather than the equipment to suit the organisation. The best example (from personal experience) is of SAP software, where much of the benefits (in both improving the organization and cost savings) are through orientating the organisation to the software. Many of the failures of implementation are through

- Designing front-ends to make it more user-friendly.

- Writing bespoke reports when there are standard reports than can operate just as well (and are more reliable)

- Complex bespoke configuration.

- Have multiple configurations for a various entities or departments within the one organization.

4)      Poor stock control of spare parts leading to over-stocking, or getting rid of items that are required. I am sure that a major supplier of equipment (directly or indirectly) are traders in MOD surplus.

5)      Poor utilisation of existing equipment or assets. The MOD needs to keep huge stores in case of war – particularly of ordinance. But there are many areas where this can be improved. Again the NHS & Education may provide better (or at least more publicly accessible) examples.

 

The comments have some tie-ins with  the analogy between my shopping and improving expenditure posted on June 28th.

John Major on the need to tackle the UK Government Deficit.

Former Prime Minister, Sir John Major, today laid out, in simple language, the scale of the problem with the nation’s finances in BBC interview

I may change the order somewhat but this is a summary of what he said.

- The scale of the government deficit is unprecendented in Sir John’s lifetime.

- If it is not tackled there will be a severe crisis when our national credit rating collapses, leading to a sterling collapse, leading to soaring interest rates.

Why are we in such a mess? Sir John Major blames it on the government running a deficit in the good times, so the total debt increased when it should have been reducing.

There are 3 ways that will bring the current £180bn  deficit down.

1. Increase Taxes – but even a 5% increase in the basic rate of income tax and 20% VAT rate will do very little.

2. Cut expenditure.

3. Economic Growth

It is expenditure cuts that Sir John advocates

UPDATE 7th July – Adam Smith Institute blog has an alternative report of Sir John’s Comments.

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