Councils across the country are having to rein-in spending. This we know. We also know some councils, have been doing this for years, providing frontline services & lowering council tax at the same time. It can be done.
North East Lincolnshire Council is conducting a budget consultation, asking residents’ opinions on how they would reduce spending. This we applaud, but what makes this week’s non-job so galling is at the same time, the council is advertising for a Future Shape Programme Manager on a whacking £70,189 per annum. Unfortunately, if you are thinking about applying for this job, you’re a day too late, as applications closed yesterday, but this advert had to be highlighted. Here is the job description:
Fixed Term until December 2012
Future Shape is an exciting programme setting out the Council’s vision to be a commissioning, enabling and facilitating organisation. We want to improve experiences and outcomes for our people and our businesses, be adaptable and future proof and be a smaller and smarter organisation. It is this programme of projects that will enable us to deliver the change required.
We need an individual to shape, challenge and co-ordinate the Future Shape programme. You will establish and champion the approach to strategic change, realise maximum value from the change and ensure it is outcome focussed. Working with senior management and other key stakeholders you will ensure coherence across operational and change activity, minimising any adverse impacts of change.
You will have excellent programme and project management, excellent people management and strong leadership skills, experience of leading complex change in a large organisation and knowledge of the public sector and of the key issues in local government.
If the manager is paid over £70K, how large is the team they are going to manage? What other high salaries are there? The most recent TPA Town Hall Rich List tells us the chief executive and another five directors earn over £100K per annum. What are they doing? Surely if they want a ‘smaller and smarter organisation’ they are paid to do this? This reminds me of ‘Yes Minister’, where more staff were employed to find out whether the department was overstaffed!
Thankfully these non-jobs are getting harder to find, but if you spot one, please contact me and give me the details.
The Treasury has just published the interim Hutton Report on Fair Pay in the Public Sector.
Back in the summer the Treasury commissioned Will Hutton “… to investigate pay scales across the public sector, and make recommendations on how to ensure that no public sector manager can earn more than twenty times the lowest paid person in the organisation.”
In other words, the remit was to address the scandal of fat cat pay in the public sector – a scandal first exposed in a series of reports from the TaxPayers’ Alliance (eg see here). And to work out how to implement a 20-to-1 cap on top public sector remuneration.
Unfortunately the report has not stuck to that very clear remit. Instead, many of its 128 pages focus on top pay in the private sector, and read more like a 1970s-style politics of envy polemic.
The report kicks off by charting how the pay of the top 1% has pulled away from the average:
No matter that this relates to just 1% of the population, and most them are being paid by the market not taxpayers, for Hutton it’s a serious problem:
“Substantial and growing pay inequality poses a serious challenge to society and Government. Do high earners deserve such large rewards? And is it fair that a wide and growing gap should exist between the pay of those at the very top of the income scale and the rest of the population?”
Fair? This is the market – the thing that we’re all depending on to lift us out of our current crisis. The report goes on:
“…chief executive pay for Britain‟s leading listed companies rose by around eight times between 1986 and 2010… It is increasingly doubtful whether this has been proportional to increases in performance, or even reflects the real demand and supply for executive services. Chief executives have become treated as business super-stars drawn from an ever narrower potential pool… benchmarking between firms locks them into a kind of arms race… Any one company that tries to stand out against the trend risks losing its top people and inviting markets and investors to view it as second rate. Little… seems capable of creating more rationality or slowing the pace of increase… There is widespread scepticism whether this degree of increase in executive pay is fair.”
Fair – there it is again. Of course, some private sector chief execs may get paid more than they’re worth – just like some Premier League footballers. But why should we care – especially when many of the report’s shock figures relate to a mere one hundred FTSE100 CEOs (whose average tenure has now fallen to about 3 years). Surely what we care about is what they do for us as customers, whether they deliver good returns to us as shareholders, and whether they stay within the law. Everything else is so much envy.
Now public sector pay, that’s a different matter entirely. Because we have to fund that through compulsory taxation. We’re very interested indeed in what those people get paid because it comes straight out of our wallets. We can’t choose to take our custom elsewhere, and we can’t sell our shares in their companies.
So what does the report say on top public sector pay – ie the thing it was supposed to look at.
First, it tells us that there are now no fewer than 20,000 public sector employees in the top 1% of income earners (earning over £117,523 pa). Well, actually that’s a rehash of some numbers given on a recent BBC Panorama programme which said 38,000 are earning more than £100,000, and 9,000 are earning more than the Prime Minister.
Anyway, most of Hutton’s 20,000 turn out to be doctors employed by the NHS (largely thanks to some huge pay awards conceded by the last government). But there are also 4,000 managers distributed across the various bits of the public sector as follows:
These findings are broadly consistent with what the TPA has previously published in its Public Sector Rich Lists (eg here) – if anything, Hutton’s overall fatcat count is higher than the TPA’s.
In terms of pay growth under Labour, Hutton confirms that top public sector managers generally did outstandingly well. For example, between 2000 and 2009 chief execs of NHS hospital trusts got an average 50% increase in real terms:
The bottom line is that Hutton pretty well confirms everything the TPA has been saying on public sector fat cats – thanks to big pay increases over the last decade there are now thousands of them.
So does the report congratulate the TPA for outstanding service to taxpayers? Er, no. It actually suggests the TPA has been misleading the public:
” Top pay in the public sector has come under greater media scrutiny in recent years… But public understanding remains divorced from the data set out in this[report]…
Limited understanding feeds through into the wider debate. Campaign groups such as the Taxpayer’ Alliance argue that the public sector must get value for money – which they define as paying the lowest amount to secure a suitable candidate – but that it does not currently achieve this…
A media narrative which over-concentrates on public sector ‘fat cats’ while not offering the same proper scepticism and focus over what is happening at the top of the private sector does not lead to understanding, and can undermine the desirable move to greater transparency over pay.”
Allow us to translate: the TPA has been far too successful in focusing taxpayers’ attention on the cavalier way in which the public sector wastes their hard-earned cash. The spotlight on fat cat pay, and the number of bureaucrats who get paid more than the Prime Minister, has resonated with taxpayers in a way that has caused huge discomfort for the promotors of big government. This report tries to throw taxpayers off the scent by suggesting the real problem is excessive pay in the private sector.
And what about the report’s original remit? That 20-to-1 pay ratio cap for the public sector? Well, Mr Hutton and his colleagues like the idea. They like it for a number of reasons, but in particular:
“A pay ratio is an easily understandable reference point, and could give the public confidence that public sector pay is being kept in check. Defined appropriately, this can have more flexibility than merely using the Prime Minister’s salary as a benchmark.”
In other words, by accepting this ratio cap, public sector bosses could maybe get taxpayers off their back, while simultaneously getting round the current de facto pay cap of the PM’s salary. The latter clearly has to go, since post Mr Cameron’s self-imposed cut, it’s down to a measily £142,500 pa.
Hutton’s final report will be with us sometime next year. Taxpayers need to be on their guard.
We’ve blogged the fiscal Doomsday Machine many times (eg here). It’s triggered when a government’s debt interest payments grow so large that it starts to borrow increasing amounts simply to pay its interest bill. Just like with a credit card, such borrowing feeds on itself and can soon spiral out of control.
Yesterday’s autumn fiscal report from the Office for Budget Responsibility gives us a clearer fix on how our own Doomsday Machine is looking. It gives us much more detail than any previous fiscal report published by the Treasury itself. And for that, the OBR deserves congratulation.
First, the good news – the OBR under its new head Robert Chote still thinks George Osborne is on track to deliver the fiscal targets he set out in his June budget:
“Our best judgement is that the Government has a better than 50 per cent chance of meeting its mandate for a cyclically-adjusted current budget balance in 2015–16 and of achieving its supplementary target of seeing public sector net debt fall between 2014–15 and 2015–16.”
Indeed, on the OBR’s forecasts, things could well turn out better, because they reckon the downside risks to growth are evenly balanced by the upside “risks”. That is, growth could turn out higher than the central forecast, boosting tax revenues and cutting welfare payments. The OBR thinks there’s a 1-in-3 chance that the government will actually be in surplus (ie repaying debt) by 2015-16:
On the Doomsday Machine, the headline message - trumpeted by everyone from the Chancellor down – is encouraging. It is that debt interest payments are now expected to be lower than forecast in June – £18.6bn lower over the forecast period as a whole (2010-11 to 2015-16). So that’s definitely good.
But we shouldn’t get carried away. Debt interest still increases from £43bn this year to £63bn by 2015-16.
Moreover, when we look at the underlying drivers of the debt interest projection (made explicit for the first time by the OBR) we discover that what’s driving the reduction in costs is not some big cut in underlying borrowing, but a cut in the assumed interest rate the government will have to pay.
Here’s the OBR’s chart comparing June and November’s assumptions on the average interest rate HMG will have to pay on the majority of its new bond issues (so-called conventional gilts):
As we can see, November’s assumed rate is lower throughout the forecast period (by an average 0.24%). And it’s the assumed lower rates that drive the bulk of the saving.
Now those lower rates reflect what has happened in the gilt market since June, so fair enough. Especially since Mr Osborne can argue that it’s his “tough choices” that have given the market confidence to cut his borrowing rate.
But as we all know, rates that go down can also go up – especially if the market gets the jitters on inflation.
So what happens then? Again, the OBR report tells us. It includes a handy ready reckoner (Table 4.20) that shows what happens if the interest rate on gilts increases by 1% from what has been assumed. And it’s not pretty – a 1% increase throughout would add £15bn to debt interest costs (and although we can’t quite tell from the OBR table, with higher gilt yields there would almost certainly be other associated increases, reflecting for example, higher interest rates on National Savings).
One of the most interesting sections is on the long-term fiscal outlook, where an unchecked Doomsday Machine at full revs can do some real damage.
The issue there is one we’ve also blogged many times - growing numbers of dependent older people, and not enough younger workers to support and look after them. Healthcare and pension costs increase inexorably, the tax revenues generated by the young fail to keep pace, and government borrowing goes through the roof.
The OBR has cranked some numbers looking out to mid-century showing how this could impact public sector debt. It reckons that even if all future governments maintain the same degree of restraint on other items as Mr Osborne (a highly unlikely proposition given past experience), the cost of our aging population will push debt up to 100% of GDP by 2050:
But concerning though it is, that projection almost certainly understates the problem. Not only does it exclude all those off-balance sheet Enron debts, but others have projected much higher debts by mid-century (eg the Bank for International Settlements recently projected UK official public debt at 550% of GDP by 2050 – see this blog).
This is a serious problem. Something will have to be done, and none of the options are going to be popular.
The OBR says it is taking a much closer look and will be reporting back next year. We very much hope that they give it to us straight – much straighter than the “fiscal sustainability” reports the Treasury have issued in the past, which have basically made out everything’s fine. Minds need to be concentrated now, well before we wake up to discover Doomsday has arrived.
Whatever happened to the staff suggestions box? It was laughed at by many in the workplace, but occasionally someone would come up with something to make life easier, and if it saved money, quite often a bonus would be on its way to the member of staff who had the good idea.
The government asked members of the public to make their suggestions on how to combat waste in the public sector. It was inundated with responses. Councils around the country should be asking the same, and they should be starting with their own staff. How does we make our office more efficient? Is there a better way of managing this and that?
This week’s ‘non-job of the week’ is awarded to the London Borough of Hillingdon, who are advertising for a Rewards (Pay and Benefits) Manager on the not so inconsiderable salary of £39789 – £43368 per annum. Do you think this is an essential job as councils start tightening their belts?
About the job:
An exciting, specialist opportunity has arisen within the Organisational Development team of our Human Resources department. We’re looking for a Reward Manager to support the delivery of a performance related strategy and culture, which effectively recognises and remunerates critical skills, capabilities, experience, and performance within the council. The successful candidate will lead on all aspects of reward, ensuring that policies, procedures and programmes are aligned to the council’s workforce strategy and relevant current legislation. In addition, the post-holder will work in collaboration with HR colleagues and stakeholders to identify the requirements of the organisation in relation to reward.
About the person
We’re looking for an appropriately qualified professional experienced in the management of organisation pay structures and job evaluation schemes, and critically with experience of leading on and developing organisational reward strategies.
Most council employees will be happy to be in a job. When you hear your local community centre may have to raise its charges to voluntary groups, because the council can no longer afford to subsidise it, do you expect to read job adverts like this one? Of course not, yet some councils still think it’s ‘business as usual’. Come on Hillingdon. Forget this non-job, and get on with providing the services taxpayers expect you to provide.
Our recent report on non-jobs highlighted climate change officers as posts that could easily be dispensed with. Councils could take a lead from Windsor and Maidenhead Council who do not employ climate change officers. Instead it bought smart meters and energy consumption fell by 15%. Instead of wasting money, Windsor and Maidenhead saved money.
An advert in The Guardian reveals Cambridge City Council doesn’t think this way, and urgently needs a climate change officer, paying £15-17 per hour. It seems Gloucestershire County Council is also desperate to fill this non-job, and is willing to pay £20,198 – £26,276 per annum. In the job description the council asks the following:
“Are you interested in the environment? Are you interested in making a difference? If so this is the job for you! We are looking for a motivated self starter who will champion the environment in our sustainability team. You will be particularly focused on setting policy regarding preparing for climate change, monitoring effective action and ensuring the policy delivers the desired outcomes.”
My advice is: Buy some smart meters!
The non-job this week though is brought to us by Surrey County Council who will shortly be interviewing for an Organisational Development Adviser – Talent Management, paying a salary of £32,169 per annum. When it comes to gobbledegook, Surrey has excelled itself. Sir Humphrey Appleby would have been very proud.
“In this key emerging assignment, you’ll work with the Head of HR&OD to help shape new ideas, strategies and policies in Organisation Development and Learning & Development. As the lead manager for this assignment, you’ll undertake research and analysis and you will recommend, design and deliver a fit-for-purpose Surrey County Council (SCC) strategy.
Specifically, you will be required initially to explore and build on best practice and innovative approaches from within SCC and in other organisations – including the private sector, think tanks, business schools and thought leaders. You will gather and share insights with stakeholders to help inform and shape a SCC perspective.
You will then build a strategy that focuses on bringing the best out of our people so that we benefit from the combined strength of a talented staff pool. This strategy will have an inclusive scope, it should support SCC’s world-class vision and values and it will be aligned with business objectives around performance, people and organisational capability. The result will be a greater sense of pride within the organisation and a stronger SCC employer brand. It will also help to inform and shape related OD activity.”
I hope you feel enlightened! It should go without saying – but obviously still needs to be said – that councils should be concentrating on providing frontline services. If Surrey County Council wants to know how to improve the ‘working experience’ for its staff, why doesn’t it simply ask them?
All credit to Iain Duncan Smith for pressing on with his welfare reform package in the face of a bare fiscal cupboard.
He hasn't been able to achieve as much as we'd hoped and proposed back in the summer (see here), but he has managed to hold on to the crucial central feature of any meaningful reform of working age welfare – that work should always pay.
Under his planned Universal Credit the poor will no longer face effective marginal tax rates on their earnings in excess of 80% (ie they will no longer lose 80 or 90 pence or more of every extra pound they earn). Instead, the maximum anybody will lose is 76% (the combined effect of a 65% benefits withdrawal rate overlaid on 20% basic income tax rate, plus employees' National insurance).
Yes, that is still far too high – much higher than the 55% fixed maximum we incorporated in our own proposal. But the Universal Credit is much simpler than the current impenetrable morass, and that will eventually save administration costs and cut the losses from fraud and error. Most importantly, it at last it offers the poor some certainty – certainty that they will always be better off working than not working.
Here's how the Universal Credit will look for two key groups – single people, and couples with two children. The charts show how their net incomes increase according to how many hours they work, assuming they are earning the minimum wage. We can see how both groups are almost always better off under the new system compared to the existing arrangements, and that they are always better off working more hours:
Moreover, Duncan Smith has pledged something our proposal did not offer – that nobody will be any worse off under his plan than under the current system.
Clearly that is a very reassuring promise, but it is also very expensive. Which is why we didn't propose it, and why, despite the additional £2bn IDS has set aside to smooth implementation, there is not enough money to fund lower effective tax rates.
As we have discussed many times, there are some extremely difficult choices here. Everyone wants to cut those high effective marginal tax rates in order to provide a compelling reward for working. But it is enormously expensive – our own calculations suggested that to cut the effective tax rate by 10 percentage points would cost £10 – 20 bn pa.
So in these tough fiscal times where are we to find the money? Our answer was to cut the official definition of the poverty line from 60% to 50% of median income, which we reckoned would save £20 – 30bn pa. And that would fund a substantial cut in marginal tax rates, making work much more attractive to the poor.
Duncan Smith has shied away from such a dramatic change. The White Paper reports that DWP have studied our proposal but they don't like the prospect of "substantial numbers of people in vulnerable situations losing entitlement".
And that is the nub of the problem. We find ourselves with a welfare system that has rewarded poor people for not working. 6 million of our working age poor are now dependent on welfare rather than their own earnings. And we all agree that we must rebalance the incentives so that work is always going to be the more attractive option.
But we simply don't have the cash to focus the entire shift on increasing the reward from work. The inconvenient truth is that in one way or another we will have to find some way of cutting the current level of welfare provision for the able bodied poor.
We certainly welcome the Duncan Smith reforms, which undoubtedly point us in the right direction. But we should be under no illusions - some even more difficult decisions still lie ahead.
Norfolk County Strategic Partnership are, apparently, looking to fill the post of “Community Cohesion Officer” on a contract of 18months, which could possibly be extended to 2 years. The salary dwarfs many of those providing frontline services and – indeed – most private sector salaries at a staggering £36,306 to £41,421. And how do we measure what value we’re getting from this post? Your guess is as good as mine, but for that money we might hope that the many different demographics of Norfolk are rubbing along very nicely indeed.
Another baffled supporter emailed us with a job advert that – despite his working knowledge of 6 languages – he’d totally failed to decipher. The “Interim Workstream Lead – Commissioning” positions are being publicised by a recruitment agency on behalf of a ‘local government client’ in the West Midlands (who are probably wise to keep quiet in the current climate) and offer a contract of 4-6months where the lucky new hires will be earning as much as £300-£400 per day. Doing what, you might ask? Well maybe you’ll have better luck with this one:
“Our local government client based in West Midlands is looking for an Interim Workstream Lead Commissioning to support the Putting People First Programme Manager in preparing for personalised commissioning in line with the Putting People First agenda. There are two roles, one covering Enabling the Citizen programme and another Enabling the Market programme.
You will be responsible for:
- Leading on preparatory work to strengthen commissioning processes and optimise readiness to implement the personalised agenda
- Coordinating and overseeing the Enabling the Citizen or ‘Enabling the Market Workstream of the PPF Programme
- Ensuring that all commissioning strategies reflect the PPF agenda
- Supporting lead officers in the delivery of individual readiness.”
As we don’t really know what any of this means, it can’t really be the non-job of the week, so this Wednesday that accolade goes to Sheffield City Council:
“Director of Culture and Environment
Up to £89,831
As one of the UK’s largest cities with an illustrious history, Sheffield has always been a place of ambition, an amazing place with amazing people. A city that offers opportunity for all. A city whose centre has been transformed over the last ten years and whose ambitions now include not only broadening that investment to the city as a whole and accelerating the culture of enterprise and business growth but also in positioning itself on a truly European scale.
To help realise this ambition the newly created Place portfolio, focussing on the impact and outcome to the city as a whole has an exciting career opportunity at Director level.
This new post will lead on a new block designed to bring together the cultural and environmental aspects of place making and shaping into one area. This post will develop and lead the Culture and Environment discussion within Place and provide the strategic direction and product development for the following areas; Sports assets and development, Culture and Arts, Leisure Trusts client side, Trees and Woodlands, Events Management, Parks and Countryside”.
A new directors post at a time of cuts…really?
A list of all the RDA-owned freehold land and property assets has been released by the Government. Laura Sandys MP submitted a Parliamentary Question to the House last Thursday and the list is now available online. Immediate eye-brow raisers are the Dog and Partridge pub in Dudley, as well as another boozer and a fish and chip shop in Scarborough. Another blog has also spotted a greyhound stadium in Portsmouth and an ice rink in Durham.
There are 379 properties in total. Have a look through the list and see what property your RDA owns. Would the property be put to better use in private hands? Does RDA ownership of any properties hinder other businesses from developing or growing? Who gets these properties when the RDAs wind down? If any strike you as particularly odd then write to your local councillor or MP here and let them know. Selling these assets would raise a lot of money and would stop these local leviathans calling the shots in England’s regions.
Margaret Hodge is the new chair of the Public Accounts Committee and she has already concluded that government departments are incapable of eliminating waste. Her Committee has found that £35bn of efficiency savings ordered by Labour in 2007 were nowhere near achieved:
"Departments were in general unable to make real value-for-money savings of 3% a year following the 2007 Comprehensive Spending Review – and that was at a time of increasing budgets. Now that much more radical cost-cutting measures are required across government, my committee is gravely concerned about the ability of government to make efficiency improvements on the scale needed."
The PAC report itself gives some chapter and verse. To start with, none of the departments has come anywhere near its savings target. Halfway through the three year programme, declared savings came to just 31% of the target, with some key departments way short of even that:
Worse, nearly two-thirds of these supposedly achieved savings are not provable in any meaningful sense. They are products of wishful thinking and deckchair rearrangement.
As for relating the savings to departmental budgets:
"Departments were generally unable to reconcile their reported savings to either their financial accounts or to their spending agreements with the Treasury."
Shocking. Truly shocking.
Of course, for regular BOM readers it won't be shocking at all. For years we've been blogging the fantasy world of Gershon delusion and the Marx Brothers – the preposterous idea that Whitehall can achieve huge efficiency savings without saving any actual money, or making anything demonstrably more efficient (see many previous blogs eg here). But for poor Margaret Hodge it has all come as a nasty shock.
The real question is what should we do about it?
The left's answer - widely aired on the BBC yesterday - is that it means the coalition's spending cuts are unachievable without massive damage to our public services. Departments cannot do efficiency and to assume they can will consign schools and hospitals to a new dark age. Stop the cuts. QED.
In fairness to the PAC, their report (as opposed to the headlines based thereon) doesn't say that. Instead, they argue for more transparency on efficiency savings, with more explicit reporting of inputs and outputs so everyone can see whether important services are being cut. They also want the Treasury to take a much larger role in guiding and verifying the savings. Which all sounds kind of sensible in a marginal improvement kind of way.
But the real message from the report – the real message from Margaret – is much more radical.
The real message is that to make serious efficiency savings – the kind private business is constantly making – we need radical reform in the way our public services get delivered.
In particular – and we do apologise if we've said this a few times before – we must break up our big state monoplies in areas like health and education. We must have choice and competition across the public services.
Because the key reason that businesses like Tesco are so good at driving efficiency is not because they are inherently much smarter than public sector managers. It's because they face a completely different set of incentives. They know that they must deliver what their customers want or perish. And a large part of that delivery comprises value for money. If they get fat and inefficient, they can't deliver value and they lose their customers.
We have never believed we can make monopolistic public sector elephants dance. And whether she understands it or not, that is precisely what Margaret Hodge told us yesterday.
Margaret's message is that we must learn from her party's failure. To make cuts without destroying the delivery of public services, the coalition must tackle the underlying problem. They must break up the public sector and unleash the power of choice and competition.
On the website ‘publicsectorjobs.net’ we found that Ballymena Borough Council are looking for a ‘Part-time Assistant Community Relations Officer’ on £19,621- 21,519 pro-rata to implement the authorities ‘Good Relations Strategy’, which just looks like more busybodying on the taxpayer whilst frontline services come under threat.
And notably, some of the vacant posts we’ve been finding are of the type identified by our recent Unnecessary Jobs paper – like the Climate Change Officer being offered between £20,198 – £26,276 per year to work at Gloucestershire County Council, where they will join two other such officers…
Similarly, this week’s non-job of the week came under fire in our recent report, but that hasn’t stopped Nottingham City Council (who actually failed to respond when we contacted them as part of our original research):
“Equality and Diversity Consultant
£25k – £35k pa
Ideally you have experience of the Equality Framework for local government, equality impact assessment and equality within procurement. You will be very strong on building relationships with colleagues and managers as well as external bodies, and able to support the internal staff networks for various groups. You should also be used to working under pressure and to tight deadlines and capable of operating in an autonomous environment”.
A brief description for a pretty lucrative role, but why is it some councils seem to manage without a team of equality bureaucrats advising on stifling red-tape? Authorities need to think innovatively, and try to meet their legal obligations without creating new positions or hiring costly consultants. Some save costs by merging roles or giving certain responsibilities to existing officers rather than building whole departments around their obligations. Given the pressure on budgets, that seems like an option all of local government should be considering…
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 misleading, and even accused us of scaremongering. So let's just run through the objections and see what we make of them.
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.
But let's just 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 strong stomachs 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.
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.
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 struggle Mr 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 supporters of Big Government here 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.