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’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 https://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

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.

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.

The Adjunct to Cutting Government Expenditure

I have already posted about the need to cut government expenditure is a more rounded way through focusing on 7 major areas. There is an important adjunct to this. The ability of the economy to climb out of the recession will be hampered by

 1)      High Taxation

2)      Onerous Regulation

 The burden of these twin factors was able to be borne in the boom. They may have reduced profitability, but other factors such as low interest rates and the ever-increasing public expenditure more than offset these factors. In addition, the house-price bubble was helped by the planning constraints on new-build. This shortage of supply increased the house price inflation. Coupled with easy money and low interest rates it also helped the consumer boom.

The opposite will apply in the recovery. This is through,

 1)      The high costs of the regulation will limit the ability of firms to lower prices, whilst still remaining profitable – break even is higher.

2)      More importantly, the time taken in meeting regulatory requirements, whether in house building or in putting in place new investments, means that the payback period is lengthened.

3)      Regulations to protect workers rights means that taking on new employees is similarly discouraged (Protecting the employed in the good times means protecting the unemployed from gaining employment after the bad times – see much of Western Europe during the 1990s).

 Sustained recovery with real jobs will therefore be impaired.

 

Reducing the deficit requires not only cuts in government expenditure. It means removing the impairments of the private sector to adapt and grow.

 

John Redwood seems to be grasping this point when he recognizes that the car scrappage scheme just offsets some of the high taxes on the car industry. Here is my comment posted earlier.

 

Mr Redwood,

 You make a very valid points here about trying to undo the harm of  high taxes on the car with a subsidy for new car purchases. However, I would take issue with you on the government having encouraged new housebuilding. You have said before that house buying was encouraged house buying in the past with low interest rates from 2000 to 2005 (only then to raise them too high). However, tough planning laws have meant that during the boom the numbers of new homes being built were at record lows, with much of the new build being in apartments and not the more desirable houses. This shortage of new build when demand was (artificially) strong, further exacerbated the house price inflation.

 However, you do point to a general principle for a quick, sustainable and affordable recovery – Undo the harm done by higher taxes and more regulation.

In the boom, these extra costs were largely absorbed. They have encouraged a steeper downturn and the increased costs will slow down and diminish the recovery.

 

Cutting UK Government Spending AND Improving Services

The Tories straight-jacketed are becoming in the debate on public spending. For instance today Conservative Home reports Phillip Hammond saying that “protecting frontline services is the key reviewing government expenditure”. If the Tories do not change this debate then they will fail the nation when in government. Here are some examples from my shopping that might help them succeed:-

 

1)      VALUE FOR MONEY – It is not how much that is spent, but the output that matters. Consider an example from my shopping. Recently I bought aubergines for 49p each against 89p each at another supermarket. The quality was not as good. However, the cheaper ones were at least 3 times the size of the more expensive ones, and I use them for bulk in making ratatouille. If the Labour Government were regularly paying 89p for their aubergines, they would say it was a cutback if a switch was made the 49p variety, and lowering of quality, even though quantity was increased 3-fold.

2)      PLURALITY of SUPPLY. The standard argument is to have a single source and type of supply. In the Government sector, the NHS is the only source of supply for Healthcare and the National Curriculum is means that the syllabuses and the structure of lessons are determined centrally. In my shopping, I like to buy the branded tea and instant coffee. But in neither do I stick to one brand, or stick to one supermarket, and I tend to stock up when it is cheap. I therefore save around 30% on average. The government sector is more complex, but by having diversity it is possible to get better value.

3)      WASTE REDUCTION. I do most of the shopping in my family, as I have the knowledge of prices, where things are in supermarkets and the best idea of my family’s diverse tastes, and the quantities required. Knowing tastes and quantities means that mistakes are minimized. We occasionally waste food in the household, but it is far less than 20% that is claim nationally. The Labour Government may have looked at cheaper sources of supply, but not consistently. In particular, as tastes change it

4)      PRODUCTIVITY. Mine and my partner’s time is valuable. We neither want to spent large parts of out time on shopping or cooking. Therefore, we would not normally make bread, pizzas, sauces or sausages as these would waste time. In cooking, we may cook large joints of meat and freeze some, as this saves both time and cost. There is a lot of trail and error in this and learning by experience. The Government, consistently, has looked at extending existing services and creating new functions, with an eye solely on the public perception and no particular view on how much output is achieved for a given input. In so doing productivity has probably fallen. See Burning our Money here.

5)      FINANCIAL CONSTRAINTS. When shopping, I do not look for the absolute cheapest, nor do we do without luxuries. But too many luxuries, and too few bargains will lead to the overall household weekly shopping envelope constraining other expenditure, such as housing, cars and holidays. What is best is to have flexibility, so luxuries can be afforded, quality is generally good, diversity is high, new things tried yet cost is kept low. The Labour Government has for too long deceived itself about the financial constraints, first juggling over the course of the business cycle, then believing that boom and bust has vanished. Now there is the deepest recession since the constraints are massive, as government was already over-spending in the good times.

6)      MAINTAINING FOCUS ON PRIORITIES. When shopping for the best bargains, I do not lose sight of the fact of that I am aiming to satisfy the needs of my family. I do not slavishly pander to the whims of the children (though I do provide some treats and some junk food), nor do we do without all luxuries and treats. Rather, it is a balance of getting value, and concentrating on the basic goods that need to be purchased week in week out. For the Labour Government, too many items that should be classed luxuries, or “nice to have”, have become essentials and basic human rights. When it comes to stressing priorities they have little idea. Rather than make such a decision, they are waiting to be forced to make a decision, and then cuts are likely to be evenly made across the board.

7)      CONSIDER THE INTEREST OF THE RECIEVER AS NUMBER ONE. I look for the best offers in each supermarket. I take note and take advantage of pricing mistakes (such as making smaller packets cheaper per unit than larger ones); can see usually through phoney offers (usually); buy supermarket own-brands and trawl the discount cabinets for items at their sell-by date. In other words, I would like to think a supermarket’s profit margins on my shopping is somewhat below the average. My interest becomes before that of the supermarket. In Government, much of what is done is due to pandering to the government sector workers. Serving the general public is just another priority to be considered. Government should exist to serve the people. Everything should follow from that. This includes the interest of the public servants.

 

The analogy is only that. It does not encompass all the issues, and some areas (such as productivity and maintenance of priorities) are ranked as more important for government, whereas value for money in every item is the most important for my weekly shop. However, if it is the welfare of the nation that is our concern, it is a good way to move away from sterile and unproductive arguments.