Feb 2010 09

Charter Cities4

It will be even worse now

As long as anyone can remember, Britain's old industrial heartlands have been a disaster area. Once they'd lost their traditional industries like steel and shipbuilding, something very bad happened to them - they seemed to lose the will to live.

And as we've blogged many times (eg here), despite decades of political promises and billions of tax-funded support, they have never managed to leave the high dependency unit. For example, when last sighted – in 2007-08 at the height of the biggest economic boom the world has ever seen – around 55% of the North East's GDP comprised government spending. It will be even higher post-Crash (see chart above).

Now George Osborne has joined the long succession of politicos who want to do something. Among other things he wants to connect up our failing cities to a high speed rail network and superfast broadband.

Sounds kind of sensible – if very expensive – but given the record, why should we believe that will be any more succesful than the motorways (and that famous White Elephant across the Humber) were back in the 60s and 70s? 

No, after more than half a century of failure, it's time we started thinking much more radically.

One possiblity would be to close the North. This was pretty well what think-tank Policy Exchange suggested back in 2008 (see this blog). They advised we recognise reality, pull down the shutters on basket cases like Liverpool, Hull, and Tyneside, and ship their populations down to the prosperous (pre-Crash) South. Needless to say, they were immediately condemned for urbanocide by all and sundry, including Mr Cameron. The good citizens of Guildford weren't too keen either on account of needing to build 30,000 workers flats on Stoke Park.

Fortunately there is another more attractive option – one whose time has surely come.

Last week Policy Exchange hosted an interesting talk by the American economist Paul Romer:

"Paul spoke about his pioneering idea that city-sized areas can be created in developing countries so that their citizens can experiment with better rules. An example would be the experience of Hong King in China. He stated that by setting examples in these areas, better rules and new ideas can spread more quickly. Paul argued that large-scale migration is no longer possible. Hundreds of millions of people cannot move to places with better rules and laws. Instead they can move to Charter Cities."

Romer's proposal focuses on helping the populations of developing countries through the establishment of brand new self-governing mega-cities located on the coast for easy access to the outside world and a ready supply of water. Like old-time Hong Kong and Singapore, these Charter Cities would be dedicated to hard work and enterprise; tax and economic regulation would be minimal, with for example, no minimum wage and no social benefits. But crucially, the rule of law – both criminal and civil - would be paramount, and guaranteed by some strong third party from the developed world outside (and if you're thinking that sounds awfully like the British Empire, so were we).

In truth, most of the audience seemed sceptical that this proposal could ever fly (for example, what's in it for the guarantors?). But what if instead of establishing new Charter Cities on the coasts of developing countries, we simply reconstituted some of our own dying coastal cities? Liverpool, Hull, and Tyneside would be good places to start.

Take Hull. Given its prime location facing Europe, we've long believed it has huge potential, and yet it has failed dismally to exploit it. Suppose it became our own version of a Charter City – minimum wage and working hours regulations abolished, social benefits for working age citizens abolished (maybe a 5 year phased withdrawal), central government economic and planning and regulations abolished, no more central government development assistance but a 10% flat rate income tax, 10% Corporation Tax rate, and no capital gains tax.

Public spending as a percentage of GDP would obviously fall sharply, and those that depend on public spending would certainly feel the squeeze (although welfare recipients could be given the option of staying on benefit if they relocated outside the City). But against that, Hull would attract entrepreneurs and private investment on an unprecedented scale – and with its easy European access, much of the inflow would come from overseas. There would soon be jobs for all.

Yes, yes, of course. We can't do it because of the 53rd EU Directive on not doing stuff. And there's also the question of human rights. And anyway, we might end up with all kinds of Coketown beastliness, and children being sent down the mines. And… well… anything might happen… it's impossible to predict.

Yes, yes, we know all that.

But have you ever been to Hull?

Do you honestly think faster trains and better broadband are the answer?

PS If you want to know more about Romer's proposals, here's a vid he made earlier:

PPS Romer's real claim to fame is in developing his path-breaking endogenous growth model 20 years ago. Yes, that is the same endogenous growth that has guided the Great Helmsman so successfully.

Feb 2010 04

But Not Yet13

Hmm… on second thoughts…
Everybody now agrees that public spending has to be cut significantly. But not everyone agrees on when. And despite what we may sometimes suggest on BOM, not everyone who says we can put it off is an out-and-out scoundrel.

For example, the FT's respected commentator Martin Wolf has repeatedly argued the case for delay. Yesterday he wrote:

"What needs to be done depends on the state of the various economies, with the case for continued stimulus strongest in Europe… That point was made by Dominique Strauss-Kahn, managing director of the International Monetary Fund. He also made another one: if we exit too late, we waste resources in excessive public deficits and debt; if we exit too soon, we risk the devastating shock to confidence of a “double dip”. Given this asymmetry, we should not withdraw stimulus early."

It's a perfectly reasonable argument, but also a dangerous one. Because that asymmetry Wolf highlights is more apparent than real. In reality, it is by no means clear that delaying the cuts keeps confidence intact. Confidence could suffer just as devastating a shock if we delay – as the Greeks are currently discovering. The Greeks are now being forced into a whole raft of emergency cuts precisely because previous delays and prevarication have undermined the confidence of financial markets.

Confidence is a delicate, little understood flower, and what nobody can predict with any certainty is how far we can go with our borrowing before it withers and dies.

As things stand, the OECD says our official debt will reach 94% of GDP by the end of next year (gross debt). Even setting aside the fact that our official debt excludes all those off-balance sheet Enron items like PFI, 94% is very scary. As we blogged here, the IMF recommends we get that percentage down to 60% as a maximum. Anything higher risks the government finding itself in a position where it no longer has the flexibility to increase its borrowing should a future need arise. Which is where Greece now finds itself.

Unfortunately, far from getting our debt ratio down, our rampant public borrowing is currently adding to it at the rate of 13 percentage points pa.

And as we've blogged before (eg here), that borrowing is now feeding back into an alarming escalation of debt interest costs. By next year debt interest costs will consume nearly 10% of government revenue, up from just over 5% as recently as 2008-09.

Even worse, that escalation is taking place even though the financial markets have so far remained remarkably patient in terms of the interest rate they charge HMG (ie the yield on gilts). What will happen if the markets lose their patience and push those rates up?

As it happens, the IFS has just published some rather scary estimates of how that might play out (HTP Andrew L). They report a statistical analysis with quantified estimates of how government debt and structural fiscal deficits have affected gilt yields historically. They conclude that if our structural deficit is left at current levels – ie there are no substantive cuts – then gilt yields could "easily reach double digits" by end-2011.

Now, those yields are currently around 4% (10 year gilts), so that is a huge increase. Translating it into debt interest costs, it would mean that our prospective annual borrowing of £150-£200bn would generate additional annual servicing costs of £15-£20bn pa, rather than the £6-£8bn currently assumed. And of course, such costs are cumulative – three years of borrowing at 10% would add £50-£60bn pa to debt servicing costs. Or, £2,000 pa of additional taxes for the average household every single year.

 
Which is why we need to push on with those spending cuts right away. With our public sector debt rapidly escalating, we can't afford the risk of saying we'll cut but not yet. We need to prove to the markets that we're serious. We need to show we're ready to accept some short-term pain, and that we don't need a Greek-style crisis to concentrate our minds.

As the man in the picture meant to say, 'Grant me chastity and continence, and do it now!'

Feb 2010 03

Non-job of the week10

No fewer than 524 public sector jobs advertised on the Guardian jobsite today, and – as with every week – there’s no certainly shortage of dubious positions.

This week’s non-job fits firmly into the category of unnecessary and ultimately intrusive roles that have become a staple within local government. Another week, another professional community busy-body and this week it’s Luton Borough Council that are advertising:Nj10

“Neighbourhood Co-ordinator
 £32,522 – £35,145 p.a.

Luton is a diverse, multi-cultural town of 200,000 residents. The area is home to over 100 nationalities, difficult cultures, religions and ethnic groups at all different levels of prosperity. This interesting and vibrant setting creates a rich set of social situations to shape our Integrated Youth Service.

Our new Integrated Service is developing an enhanced service for all young people in Luton and is committed to ensuring successful transition into adult life for all young people aged 11-19. We believe Luton’s committed children’s workforce, compact geography and strong partnership foundations help us build strong integrated neighbourhood working.

You’ll be a key player in the development of information, advice and guidance (IAG) and youth work in the West of Luton so you will need to have in-depth experience of working with young people and experience of supervising a team of practitioners. If you have the experience and enthusiasm to make this post work and help develop an excellent service we would like to hear from you”.
 
My favourite line is “(Luton) is committed to ensuring successful transition into adult life for all young people aged 11-19”, you can choose yours. Remember when children turned into adults without such rigorous participation/facilitation from the local council?

And since when was it the responsibility of the applicant to ‘make the post work’? Surely the post is a complex combo of important, necessary tasks that need an adequate professional to fulfil them, not a vague concept that needs to be developed into a legitimate job by whoever lands it? 

The role is part of a three tiered team, with youth workers below and the head of service above. Who can say if this hierarchy will swell to encompass more titles and ambiguous positions? We can only say that based on previous experience it seems fairly likely.

Jan 2010 29

The Limits Of Credit Card Government0

Hopefully Mr Osborne has got his scissors ready

Greece is giving us all an object lesson in the limits of credit card government. According to this morning's FT:

"…anxiety over Greece rose in financial markets, driving Greek bond yields up to 7.25 per cent, closing on Hungary, a non-eurozone state bailed out by the EU and the IMF in 2008.

Greek yields have risen by more than one percentage point this week and by three percentage points since October.

George Papandreou, Greece’s prime minister, blamed “malicious forces” for stories about Athens seeking funds from China and elsewhere, which helped trigger the turmoil…  investors warned they might shun Greek debt, accusing Greek ministers and bankers of mishandling the bond issue, which left some funds nursing heavy losses."

Luckily for the Greeks, the EU will not let them fail, and is reportedly putting together a bail-out. Unluckily for the Greeks, the EU (aka the Germans and the French) will insist on huge and immediate spending cuts and tax increases. The Greek government has lost control of the situation, and Greece may well be made an example of, specifically to encourage other debtor nations like Portugal and Spain.

"Dr Doom" Roubini puts it this way :

"If Greece goes under that's a problem for the eurozone. If Spain goes under it's a disaster."

Fortunately, Jose Luis Zapatero, Spain's premier, assures us there isn't going to be a Spanish disaster:

"Spanish public debt (52pc of GDP) is 20pc lower than Europe's average; our treasury spends 5pc of revenues on debt costs, less than France and Germany."

Which is very interesting.

Because on that basis, Spain looks like a paragon of fiscal virtue not just compared to Greece, but also compared to us here in the UK.

We've looked at the following comparison chart before, but this time we've added Spain. It shows the OECD's latest estimate of structural fiscal deficits (ie the bit of the government deficit that will not disappear automatically when the recession ends). And as we can see, when it comes to borrowing, the UK is by far the worst of the bunch, worse even than the so-called PIGS (Portugal, Italy, Greece, and Spain):

Now, it is true that Portugal, Italy, and Greece are all currently worse than us in terms of debt outstanding, but we're catching up fast (see yesterday's blog on the Ring of Fire). And as Zapatero says, Spain's outstanding debt is actually lower than other countries, including us. According to the OECD, Spain's gross government debt is currently 67% of GDP (2010), whereas ours is 83% (remembering of course that this is just our official debt, excluding all the off-balance sheet Enron items).

And Zapatero also points to the importance of the debt interest burden – how much of the government's revenue has to go on paying interest costs. In Spain's case it's a relatively comfortable 5%, and that was roughly where we were before the bubble burst. Unfortunately, our debt interest burden is now escalating wildly. According to the Pre-Budget Report, it will reach 8.6% in 2010-11, and the IFS estimates it will reach 9.5% the following year.

Again, we've blogged this many times, under its more usual soubriquet The Doomsday Machine. The point that needs to be underlined is that for the last several years, our government has effectively enjoyed a debt holiday. The "golden legacy" inherited by Labour in 1997 included buoyant tax revenues and falling gilt yields (strongly reinforced by Mr Brown's decision on Bank of England independence – a confidence building measure that brought an immediate dividend in terms of lower gilt yields). Unfortunately, that holiday has now come to a sudden juddering halt:

Make no mistake, this is a turnaround of historic proportions. For four whole decades following WW2, British taxpayers struggled under the burden of the War's massive cost. An average 12% of our taxes – one pound in every eight – went not on providing public services, but simply on paying debt interest.
And right now, we are headed straight back to where we started. And this time, in a world of globalised PIMCO markets, and no exchange controls, we are going to find that the consequences in terms of HMG's borrowing costs are much worse than they were in the 40s and 50s.
 
Which is why it is absolutely vital that whoever is Chancellor after the election doesn't duck the need for big spending cuts in the summer budget. As the FT reports, the interest rate on Greek debt has jumped 1% in a week, and is up 3% in the last three months. If the new Chancellor fails to grip the problem at the first attempt, that could easily happen to us – or much worse.
PS Global beer giant SABMiller is joining the corporate stampede from the UK. Their CEO says: "One of the things that attracted SAB Miller to move its HQ to London and to list on the LSE in 1999 was the liberal and predictable tax regime. That's no longer the case. Today the tax system is not predictable and there have been numerous increases, particularly when it comes to personal taxation. This means that as a global company we are no longer able to attract our best global talent to the UK. Why would someone move from Hong Kong where the marginal tax rate is 15 per cent and come to the UK where it is closer to 52 per cent. Taxation was a key part of our decision to locate a new global procurement business not in the UK but in Zug in Switzerland." That ticking noise is getting a lot louder.
Jan 2010 28

Resting On A Bed Of Nitroglycerin In The Ring Of Fire4

The world's biggest and most influential bond manager, PIMCO, has just passed a further and even more worrying judgement on our precarious financial position (see this blog for previous warning). Bill Gross, PIMCO's top man, offers the following advice to investors:

"The UK is a must to avoid. Its Gilts are resting on a bed of nitroglycerine. High debt with the potential to devalue its currency present high risks for bond investors. In addition, its interest rates are already artificially influenced by accounting standards that at one point last year produced long-term real interest rates of 1/2 % and lower."

He describes us as sitting in “The Ring of Fire”:

"These red zone countries are ones with the potential for public debt to exceed 90% of GDP within a few years’ time, which would slow GDP by 1% or more. The yellow and green areas are considered to be the most conservative and potentially most solvent, with the potential for higher growth."

And here's his chart:

Now OK, we're not the only ones in The Ring. But we are the ones whose debt position is deteriorating most rapidly, simply because we have the highest annual borrowing. And some of our Ring companions, like Greece, are already starting to smoulder alarmingly.
 
The thing is, Mr Gross is not saying this because he has a political axe to grind. He's not saying it because he opposes Labour's big government state. No, he's saying it because this is what PIMCO's investment analysis shows. True, he's almost certainly sold his own gilts already, so to that extent his statement can be seen as self-serving. And his chart is obviously dressed to impress. But if you think he's blagging, just read his newsletter.

So what does HMG have to say?

Treasury Minister Stephen Timms says:

"That company has made rather similar comments in the past. It is entirely untrue. We have continued to see a good level of demand for gilts. I only point to the fact that our auctions have been well covered and I am confident that we will continue to meet our needs."

But the head of the government's Debt Management Office – the people responsible for actually selling the £200bn+ of gilts HMG will need to issue every year for the forseeable future - doesn't sound quite so sure. He tells the FT he's worried about the end of Quantitative Easing, the Bank of England's programme to fund the fiscal deficit by printing money:

“We are in a transitional phase in as much as nobody in the market knows what the next step of the Bank of England will be. That transitional phase is always going to be a pivotal moment for the market. We are moving from one state to another and that could increase the short-term uncertainty un-til it is clear what the MPC has decided on as their next course of action. It could mean we move into a different pricing environment.”

A different pricing environment: that's certainly one way to describe a Ring of Fire.

Let's hope Mssrs Cameron and Osborne are taking this in. Because although nobody expects the current fag-end administration to do anything meaningful about our borrowing, the markets won't be so forgiving with the new team. They will be looking for action, not talk.

Jan 2010 27

Non-job of the week0

Big competition for this week’s non-job, with new organisation the Child Maintenance Enforcement Commission advertising for almost £400,000 worth of jobs, many of which were specifically marketing/PR/press related and based on building the image rather than addressing issues.

Additionally, Camden Council are on the look out for a Sustainability Engagement & Events OfficerNJ10 (£31,152 – £33,306), dedicated to spending money devising campaigns and staging “themed events” to draw attention to environmental matters. The proliferation of such “awareness campaigns” driven by burgeoning departments within both local and central government means climate change concerns are already highly visible so perhaps if Camden Council want to save the planet they might want to think more practically about how they use this money, or indeed about how they could modify their own behaviour in terms of mileage, energy use etc.

The ‘winner’ of this week’s non-job, or rather non-jobs, is Redcar & Cleveland Borough Council’s Guardian advert (and remember our councils are strapped for cash…):

“PR & Marketing Specialist (2 Posts)
£34,549 – £36,313 Per Annum  

Redcar & Cleveland Council is looking for highly motivated Public Relations and Marketing experts to join its new Public Relations and Consultation Team.
The team’s goal is to deliver an excellent public relations and consultation function which increases awareness of and satisfaction with council services. It will advise on public relations, marketing and consultation on high profile issues.

The Team requires two Public Relations and Marketing Specialists. The Specialists will be able to organise public relations and marketing across the Council and the Borough’s Strategic Partnership, delivering internal and external messages to a wide range of audiences.
Redcar & Cleveland Council have an attractive benefits package including:-

• Generous annual leave (min 27 days)
• Flexible working hours
• Final salary pension scheme
• Family friendly benefits
• Childcare voucher scheme
• Staff discount scheme
• Discount leisure facilities"

Phew! Nice work if you can get it. Redcar & Cleveland Council must have had almost £80,000 burning a hole in their pocket when they advertised for these two spin doctors (or some serious misdemeanours to clear-up…), and it’s hard to know what’s more attractive – the salary or the benefits. You don’t see too many final salary pension schemes advertised in the private sector these days…

We’re being told that local authorities nationwide are having to cut back on their frontline services and raise council tax, and yet here we see that some councils are still prioritising their own public profile over what’s actually important to local residents. Is this really what is needed?

Jan 2010 26

15% Gets Wasted – Official3

We've just had a very interesting new estimate of public spending waste.

According to a detailed study of spending in London, 15% of what taxpayers spend on public services gets wasted. In London alone that amounts to £11bn pa, and if extrapolated across the entire country suggests total waste is running at £75bn pa.

Now, here on BOM we've quoted a number of overall waste estimates over the years, and most of them come out even higher at around 20% (eg see this blog). But the interesting thing about this new estimate is that it comes from HMG.

Specifically, it comes from a operation called Total Place, which has been set up by the Treasury, the Department for Communities and Local Government (DCLG), and the Local Government Association. Here's how it describes itself:

Total Place is a new initiative that looks at how a ‘whole area’ approach to public services can lead to better services at less cost. It seeks to identify and avoid overlap and duplication between organisations – delivering a step change in both service improvement and efficiency at the local level, as well as across Whitehall.

What they are focusing on in particular is how Labour's complex web of quangos, agencies, and top-down initiatives collide at local level in a maelstrom of duplication and inefficiency – again, something we've blogged many times. And this 15% is the estimate of waste just on the public services delivered to us locally here in the UK (ie excluding things like defence, overseas aid, EU budget, as well as most of the entitlement spending on welfare benefits).

So that's £75bn pa.

Or £3,000 pa for every single household.

Or the entire annual tax take from VAT.

Just flushed away down the pan.

PS Do we have a solution? Yes we do – radical decentralisation of our public finances, with local authorities made responsible for both running and funding our local public services. We will be returning to this within the next few weeks.

Jan 2010 20

Non-job of the week20

This week’s non-job was spotted and sent in by a TPA activist and is really is the archetypal wishy-washy, semi-indefinable role that has proliferated in local government over the past few years. Let’s not forget there’s a squeeze on public finances and there will be for the foreseeable future, so such ‘right-on’ positions – presumably invented to keep us sweet – should surely be axed to free up funds for tax-cuts and the frontline services we actually want? Nj9

Come on Aberdeen City Council, do assess how vital this role really is:

“Development Officer
 £25,608-£29,245 p.a.

Post Specific Requirements: Experience of working in a developmental role, of promoting customer or citizen engagement and an understanding of the corporate goals. Presentational, facilitation and communication skills, ability to produce clear reports for a broad range of audiences and to work with diverse community interests and to promote equal opportunities. Ability to use ICT, eg. mail, word processing, databases, internet research.”

Answers on a postcard as to what ‘facilitation skills’ are…

How completely and utterly vague, but of course the second sentence manages to reveal as much as we need to know. Perhaps they should’ve called this the ‘Just Checking Everyone’s Okay Officer’– possibly well-meaning but ultimately intrusive and offensively patronising. 

It must be tiring forever trying to dream up ways to ‘tap in’ to minority communities and foist yourselves upon them, but someone’s got to do it (or at least that’s what local government seems to believe). Why must such communities be treated like a different, endangered species that require such molly-coddling and protection from the government, and on such an intensive basis? Are they not now more conspicuous by being constantly declared as ‘equal’, whilst the rest of us are presumably the sort of closed-minded throwbacks that might assume that these folk are ‘unequal’ without our governmental betters there to tell us differently?

On the full job description, the whole Development Officer role is encapsulated in two enigmatic points:

1. The development and mainstreaming of the Council's social inclusion, equalities, sustainable development, community engagement, and strengthening local democracy strategies.
2. Partnership and forum development to ensure that communities' and partners' needs are identified and represented in strategic and neighbourhood action programmes

Is this not just state-sponsored busy-bodying? Even the extended job profile fails to tell us what actual, practical tasks are required to ‘promote equal opportunities’ or develop ‘community engagement’. This is just a collection of buzzwords, not a job and it’s both baffling and worrying at once that the taxpayer will be called upon to pay for such a nonsense position when we're consistently denied the proof of any measurable impact of such schemes that seem to satisfy the conscience of the council more than actually serving the needs of the community.

Jan 2010 15

The First Available Exit5

Yesterday George Osborne promised he would start cutting public spending on Day One:

“The message could not be clearer – if you find yourself on the wrong road, you take the first available exit instead of carrying on. With the date of the general election increasingly likely to be after the beginning of the next financial year, that means we will need to make early in-year reductions in existing plans.”

Good. Much better to let the spending departments know now, before they start spending the money, that they'd better not plan next year on the basis of Labour's announced budgets. And the first available exit is a very striking image.

Unfortunately, Mr Osborne still hasn't clarified either where the major cuts will fall or how big they'll actually be.

All he told us yesterday was that "excessive spending on things like advertising and consultants" will go, and "spending on tax credits for people earning over £50,000, and spending on Child Trust Funds for better off families will all have to be cut during the financial year."

Clear enough, but he already told us that last October (see this blog), and it still only totals £7bn. What's more, big chunks of his £7bn – including the public sector pay freeze – apparently cannot now begin until the year after next (ie 2011-12).

And just to repeat what we've said many times, £7bn comes nowhere near the scale of cuts we need. As we blogged yesterday, our so-called structural deficit is around 10% of GDP, which is £150bn. And that has to be the sighting shot for spending cuts (and see here for the Economist's take on how poorly our politicos are squaring up to this).

Now, to be fair to Mr Osborne, Labour have already announced some measures to address that £150bn gap. So maybe he figures he's already got them in the bank.

Unfortunately, as we blogged here, Labour's various fiscal measures don't get going until next year, and they add up to just over 3% of GDP by 2014-15. So even setting aside the fact that one-third of that 3% comprises Labour's further disastrous tax on jobs (ie the National Insurance increases), and the fact that most of their mooted spending cuts have not been specified, it's not nearly enough. Osborne needs to find another 6%+ of GDP, or more than that if he wishes to rescind the NI increases. So far, his announced £7bn amounts to just 0.5% of GDP.

Of course, he may be thinking that if he can talk the right kind of talk, the markets may let him off the hook. Maybe they'll be prepared to go on lending on something close to current terms (4-4.5% interest rates on gilts) and give him more of a breathing space.

But if he is thinking that, as we noted yesterday, he's dicing with disaster. The markets have so far been patient because they've been persuaded the Conservatives will deliver real painful cuts pretty well immediately. Should they fail, the market reaction would be swift and ugly.

Meanwhile, it seems that defence is being lined up for big cuts whoever is in power (see this blog). And this morning we heard that the Conservatives will attempt to ease the pain of that by raiding their previously ringfenced overseas aid budget.

The idea seems to be that some of the work currently done under the MoD budget in places like Afghanistan could be funded from the aid budget instead. In fact it sounds like some of the aid budget could even be used to fund security activities currently funded by the Home Office. According to David Cameron:

"We have a defence department, a foreign affairs department and a Home Office and they all work separately. We want to be thinking, how do defence and development work together?

When we think about what we do overseas, we have to think about how it can affect people at home….

A National Security Council will mean we think of those things. The different departments will all sit around and say ‘What is in our National Security interests?’"

Aid driven by national security rather than altruism: that certainly puts a different complexion on Mr Cameron's aid ringfence pledge.

As regular BOM readers will know, we have always been sceptical about our £8bn pa aid budget, believing it to be often misdirected and riddled with waste (see all previous posts gathered here). So we welcome any plan for root and branch reform – including the recognition that no spending programme is sacrosanct. But at first glance, this latest move has all the appearance of a violent swerve to escape a most ill-advised spending pledge. A sort of first available exit.

And if Mr Cameron can do this to his aid budget pledge, he can surely also do it to his much more ill-advised NHS pledge. He could extricate himself from that particular hook by, for example, using some of the NHS budget to fund activities currently funded out of the social care or welfare budgets.

Let's keep our fingers crossed – somewhere out there amid all the obfuscation and wishful thinking, it's just possible that reality is starting to bite.

Jan 2010 14

Slow Or Sudden Death?1

Yesterday, the credit rating agency Moodys opined that Greece and Portugal face a "slow death" caused by "bleeding" from the rapidly escalating cost of servicing their huge government debts:

"The risk of a 'sudden death' is negligible, but the likelihood of a 'slow death'…is high."

How will this slow death feel?

Well, over the next 5-10 years, mounting debt interest costs exacerbated by investor flight will necessitate ever higher taxes. That in turn will cause a prolonged and severe squeeze on personal consumption, private sector investment, and employment. That could well trigger outbreaks of civil commotion with unforseeable political consequences. Unfortunately, these countries will not be in a position to receive further doses of pain-killing public expenditure because the drugs cupboard will be empty.

Doesn't sound too good. Is there no alternative?

The traditional remedy was a good old-fashioned dose of inflation and currency depreciation, rapidly shrinking the government's debt in real terms, and shifting the problem away from the rioting workers and debtor businesses onto politically expendable pensioners and the rentier class. Unfortunately, the Northern Europeans in charge of monetary policy have now taken charge of the Portugese and Greek cases, and they do not believe in inflation. So that's out*.

Which leaves just one other option - large cuts in their bloated public sectors.

According to the OECD, public spending in Greece is currently running at 50% of GDP, while in Portugal it's 51%. That's far more than the government gets in tax receipts, which are running at 40% in Greece and 41% in Portugal. Increasing taxes to cover such a yawning gap is a political non-starter (quite apart from the economic damage such increases would inflict), which means spending must be cut drastically.

How much? The OECD calculations of both countries' structural deficits (ie the bit of the deficit that will not automatically correct itself when the recession ends) suggests the cuts will need to be around 6-7% of GDP in both countries. Which equates to public spending cuts in the range 10-15%.

Well, you say, what can you expect? These countries, along with several others in Southern Europe, have a long history of spending too much public money; frankly, they've been dicing with fiscal death for as long as anyone can remember.

Which may be true. But right now, their cases do provide a most instructive comparison with that of the UK.

Because on the same set of OECD figures, our public spending this year will be 53% of GDP – higher than both Greece and Portugal. But our tax receipts on 40% of GDP are no higher than Greece and Portugal's. Which means that our fiscal deficit – and in particular our structural deficit - is actually higher than theirs. In fact, at 10% of GDP, our structural deficit is the highest in the entire OECD:

Let's just repeat that.

The UK's structural fiscal deficit (ie the bit of the deficit that will not automatically correct itself when the recession ends) is the highest in the entire OECD.

And to correct our deficit with spending cuts would seem to require cuts not of 10-15% but something closer to 20% – call it £130bn – £150bn.

So what do Moodys have to say about us?

Unfortunately their full report is not online, but we do have this quote:

"The current UK government may have started the crisis as "crass" Keynesians, the next one is likely to be Ricardian to its core."

Translation: Mr Brown attempted to head off the recession with a crass dose of old-time deficit financed fiscal stimulus, but the next government needs to get real and recognise that government debt is simply deferred tax – it is not a sustainable fix for the fundamental problem of excessive government spending (see previous blogs on "crass Keynesianism" here, and "Ricardian equivalence" here).

Further translation: unless the next government delivers serious spending cuts in their very first budget, plus a credible medium term fiscal strategy, the markets are going to get seriously upset. And unlike Greece and Portugal who are locked into the relative stability of the Euro currency bloc, the UK and our dodgy currency are exposed to sudden death any time the currency market turns against us (see The day the pound nearly died for an account of events in 1976).

So for us, a slow lingering death is rather less likely. For us, the choice is public spending cuts at a time of our choosing and planned by us, or emergency cuts at a time of the market's choosing.

*Footnote It is entirely possible that the Greeks and Portugese, and perhaps the Italians and Spanish as well, might seek to escape the clutches of the ECB by abandoning the Euro. However, if they do, they will soon discover that does not provide an easy fix for their fundamental problem of overspending.

Jan 2010 13

Non-job of the week4

Well cometh the New Year, cometh the new non-jobs, and it’s fair to say that the Society Guardian is showcasing a fair few now we’re in to 2010.

A variety of surplus communications managers, community liaison officers, diversity professionals and modern-day pigeon-scarers adorn the paper and website as the local government recruitment machine splutters back into action, but snuggled in amongst them this week is a rather different sort of diversity officer, and the hands-down winner of today’s non-job of the week. Nj8

“Biodiversity Officer
£15,420 – £18,140 plus PrP/Bonus Opportunities

Located in south east London, Bexley is within easy reach of central London, rural Kent and the continent. It is a diverse borough incorporating the best features of both town and country.
We are seeking a Biodiversity Officer to help review and promote Bexley’s Biodiversity Action Plan and help improve biodiversity in the Borough.

You will be responsible for increasing the influence, relevance and practical value of Bexley’s Biodiversity Action Plan, particularly in the areas of planning and development. You will seek to secure improvements in biodiversity in Bexley, raise awareness of the importance of biodiversity and support the development and implementation of biodiversity projects. You will provide guidance and advice to Councillors, other Council services and the public on biodiversity issues. You will also contribute to the development of partnership working with other organisations.

You will work within the Strategic Planning and Development Division, a multi-disciplinary team responsible for the development of planning policy and its integration with development opportunities. You will be a key member of the Sustainability and Town Centre Development Group, whose responsibilities include environmental sustainability.

You will need a degree in a relevant discipline. You should also have experience of developing, implementing and monitoring biodiversity policy, managing projects, operating in a political environment and significantly influencing outcomes.

In addition to our competitive salaries most posts offer a generous holiday allowance, an Index Linked Final Salary Pension Scheme, relocation allowances where appropriate and the opportunity for flexible working and job share”.

Never ones to shy away from taking control of and/or manipulating any new and previously independent part of life, the council are now hiring a jobsworth to make sure the local ecosystems are to their liking by implementing…you guessed it, a dedicated ‘action plan’. It seems Bexley Council want full jurisdiction over every organism in their sphere of influence, and this blossoming department will ensure that taxpayers will be called upon to bankroll their intervention into the future.

Do we really have the resources to support this? And if biodiversity truly has to be monitored in the forensic detail suggested by this job description, could we not rely on civil society, students and enthusiasts to volunteer rather than creating yet another costly vacancy with little thought for public finances?

And what a vacancy! Bonus opportunities, a generous holiday allowance and final salary pension scheme. Not a bad package at all, and with frontline local government staff being laid off left, right and centre we won’t be alone in disputing Bexley Council’s decision to shell out for a non-vital role like this.

Jan 2010 04

Pruning The Public Sector Paybill1

New Year – New Resolve
Christmas and New Year over, it's time to tackle that fiscal hangover. 
 
If the Conservatives win the election, George Osborne's first make-or-break budget is now less than 6 months away. And it's time we had a much clearer explanation of precisely how he is proposing to deliver the spending cuts the markets are expecting.

As we know, the task is huge. Depending on whose sums you believe, to balance the budget, we need to cut public spending by between £100bn and £150bn pa. That's 15-20% of public expenditure, or £4,000-£6,000 per household.

To put it another way, if Mr Osborne fails to cut public spending, he will need to increase taxes by £100-£150bn pa. Which would require, say, increasing VAT to 30% and doubling the standard rate of income tax to 40p (see here).

So what to cut?

As we blogged many times last year, one of the prime targets has to be the public sector paybill.

When last sighted (2008-09), that was running at £160bn pa in cash terms – 11% of GDP. This year, we estimate that percentage has risen to nearly 12%, reflecting the decline in GDP and the fact that public sector employment has increased again. And this is a burden that has got a lot heavier through the years of Mr Brown's reckless spending splurge, with record numbers of new public sector jobs and higher pay all round :

So in just a decade, the public paybill burden has increased by a whopping 2 percentage points of GDP – around £30bn pa. And note that this definition of pay excludes the net accrual of future public sector pension benefits. They currently add a further £40bn pa or so (see here - Table D.1). So the true overall public sector paybill is more like 15% of GDP*.

But at least the problem is now getting some serious airtime. Mr Osborne has promised to freeze pay for public sector employees earning more than £18k pa, the LibDems promise a total freeze, and even Labour will impose a freeze on the top 40,000 (see here for the TPA's summary of main parties' cuts proposals). None of that is enough, but it's a start.

And the press are also focusing on the issue. Yesterday's Sunday Times reported its own investigation (see here):

"Public sector workers earn 7% more on average than their peers in the private sector — a pay gulf that has more than doubled since the recession began.

Official figures show that staff employed by the state are enjoying bigger pay rises, working fewer hours and receiving pensions worth up to three times as much as those in the private sector.

Civil servants, National Health Service staff, council officials and other public sector workers have enjoyed a “golden age” under Labour, according to an investigation by The Sunday Times."

They've also produced some neat graphics summarising the key statistics:

So what's to be done?

In the IOD/TPA cuts paper published last September, we recommended a two year pay freeze for all public employees (except service personnel in conflict zones), a 5% pay cut for the richest 10%, and increases in employee pension contributions and various other employment benefit reductions. Over two years we estimated that would build up to a £16bn pa total saving, or around 10% of the cash paybill.

Nobody says it will be easy, and Mr Cameron will need to face down the strong public sector unions. But make no mistake – this is the scale of saving we will need.

And if we don't do it?

Ted Bromund at the Heritage Foundation draws our attention to an identical struggle now taking place across the US.

There too, heavily unionised public employees have been been "coddled and spoiled" (as the Economist puts it), doing much better than most private sector workers, and imposing a cost burden taxpayers can no longer afford. The average pay of a Federal worker is $71,000 pa, compared to $50,000 in the private sector. On top of that, the public sector still offers medical insurance, and the kind of pension entitlements most private sector employees can only dream about (see here). What's more, public sector employment has been pretty constant through the recession, whereas the private sector has shed 6% of its workforce (see here).

So what are US politicos doing about the problem?

Yes, that's right – they're doing everything they can to avoid taking on the unions. Which means that instead of fundamental reform (eg scrapping their expensive defined benefit pension schemes), they're resorting to stop-gap measures such as recruitment freezes and asking employees to take unpaid leave. In other words they're passing the pain on to their customers via reduced service levels.

But in the US, states and municipalities can literally go bust, which means that local fiscal problems get a lot more fraught than we're used to here. At least one city has gone bust precisely because it failed to grip its paybill (the Californian city of Vallejo – see here). And because of that, there are now some signs of minds being concentrated and political resolve beginning to stir, with New York leading the way on pension reform.

So as we wait for Mr Osborne to show us that axe he's reputed to have, we'd do well to watch the US. The public sector paybill will have to be pruned drastically, and the sooner we all recognise that reality, the easier it will be to manage the public sector unions next winter.

*Footnote: the accrual of future pension benefits does not cost the government anything in current cash terms – the government simply accrues a liability to pay those benefits in the future. In effect, the government is funding part of its paybill by borrowing from its employees. But that doesn't mean the taxpayer burden is any less – it simply means we have even more debt.

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