Cutting capital spending

In the next few days I am going to seek to fill the blackhole in Labour and Lib Dem spending plans by reviewing again what needs to be done to bring public spending more into line with revenue.

There is one area were Labour has proposed large cuts in public spending where I agree – in capital spending.We might be able in the next couple of years to go further and faster than they are suggesting.

In recent years Labour has undetaken five different kinds of capital spending. There has been spending on new accommodation and equipment to expand their growing bureaucratic army. There has been spending on IT and other centralised equipment and replacement accommodation for their existing central services. They have spent on additional facilities in the main service areas like railways, schools and hospitals. They have spent on replaement facilities in the main service areas. They have spent on defence hardware, which I have partly discussed in previous blogs and will not discuss again in this one.

Any company facing a financial crisis brought on by borrowing too much and earning too little stops all but essential capital spending at an early stage in trying to control costs and cash outflow. So should any government.

All projects to expand the bureaucracy should be cancelled straight away. We need to live with what we have got- we need no more government or local government offices, no more quango computer systems to control new parts of our lives, no more new Ministerial and official cars for additional posts.

Many of the projects designed to raise efficiency and to replace existing bureaucratic back up should also be deferred or cancelled. If a project has a pay back of two years of less – if it can save more than its own cost in less than two years – then let it go ahead. If something needs replacing because it is about to cease to function or about to incur very high repair bills, then let it be replaced. Otherwise nice to have or usual cycle replacements need to be put off for better times.

All projects to increase service provision outside hospitals, surgeries and schools also need to be cancelled or deferred. There should be a Mnisterial review mechanism to allow through special cases.

We do need more road and rail space as part of our programme to make the UK a more competitive economy. This is going to have to be financed privately, and paid for by user charges, as this government did with the M6 toll road in the Midlands. There also needs to be a maintenance programme for major public assets to avoid the build up of even dearer and mor fundamental repair.

Promoted by Christine Hill on behalf of John Redwood, both at 30 Rose Street Wokingham RG40 1XU

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33 Comments

  1. Javelin
    Posted May 1, 2010 at 8:44 am | Permalink

    As I've said before don't let Labour blame the next Governments for the reduction in spending.

    It would be good to produce an objective set of figures.

    As Mervin King said don't let a generation blame the next Government for getting spending back on track.

    This recession hasn't really felt like a recession. Increases in public spending have kept at least half a million in jobs we can't afford.

    The unquestioned view in the bank where I work is that we will be in a double dip recession because the public sector is now so large that we will only see half the downturn before the election.

    • James Clover
      Posted May 1, 2010 at 8:18 pm | Permalink

      The real recession has just been postponed. It will start later this year, when taxes cut in, the pound falls farther and the public sector starts to be squeezed.
      I have mixed views about the result of the Election. I want to see Brown out, but I also want to see NuLab have to pay the price for their devastation of the economy; I want them, not the Conservatives, to have to announce the bad news. As King says, the next Government will be the most unpopular for decades, and it would be unfair for Cameron to have to join Thatcher in the mythology of the Left as a monster who enjoyed bringing the country to its knees.
      I want Cameron to win; but a great consolation if he doesn't would be the spectacle of NuLab confronting the wasteland they have created.

  2. Norman
    Posted May 1, 2010 at 8:48 am | Permalink

    'We need to live with what we have got'

    I imagine many readers of your site would be of the opinion that we can live quite comfortably with less than what 'we' have got.

  3. Tony E
    Posted May 1, 2010 at 9:08 am | Permalink

    Agree with everything apart from the roads. If you have private enterprise running the roads (post build) then you increase costs to the motorist (especially commercial transport). If you don't offset this by a reduction in taxation to account for the reduction in the percentage of road space which is provided through taxation, then the environment for business becomes less competitive.

    It is viable when there are a few toll roads. As the percentage of toll roads increases the resentment of the general public will also rise. They will object to paying twice, especially if you sell off major routes to private companies and leave alternative routes in a poor state of repair.

    It is important to restructure almost everything. but care must be taken not to enrage public opinion over fundamental issues, because it will take more than 5 years to achieve anything that will last.

  4. Mike Stallard
    Posted May 1, 2010 at 9:18 am | Permalink

    Two little footnotes to this very helpful article:
    1.Our local comprehensive is promised some £25 million to rebuild it along eco lines. Notice what comes first: the buildings, not the teachers (they are demoralised and often absent). This “spend” I hope will be cancelled. Imagine going to school on a building site for five years!
    2. Our local immigration centre (started off by the Church) is coming apart. Why? The EEDA (EU Regional Authority) has pushed so much paperwork at it that the two full time staff members (whose salaries are not guaranteed after September) are now getting frazzled and not doing their jobs properly. I look forward to the EEDA being cancelled too.
    This is a small town in the middle of nowhere. Imagine the waste in, say, Leeds!

  5. Antisthenes
    Posted May 1, 2010 at 9:24 am | Permalink

    That is all well and good but it is only tinkering with the problem, large scale reform of the public sector and the welfare system that is what is needed. Done correctly so many ills assailing the country as well as dealing with the economy will be addressed.

    Pussy footing around is going to achieve very little the time has come to grasp the nettle.

  6. Acorn
    Posted May 1, 2010 at 9:33 am | Permalink

    Best of luck JR. I think PESA 2009 said there would be about £54 billion public sector gross capital spend this year.

    To keep you on your toes, can I recommend that Redwoodians have a good read of the IFS document on the subject. There are some good explanations of how the government spending system works. Fig 5.2 is good for those who just like the pictures.

    http://www.ifs.org.uk/bns/bn43.pdf

  7. no one
    Posted May 1, 2010 at 9:44 am | Permalink

    Well capital spending is another thing Paxman allowed Brown to talk nonsense about

    The reality is much capital building, such as hospitals, has been financed by PFI and PPP funding structures, where the private sector fund the up front capital costs and then charge the public sector ongoing chunks of revenue to pay for this

    We all know Brown did this to make our borrowing look artificially low (pre banking bailouts)

    So it is complete nonsense from Brown to suggest capital spending can be cut back in the way he descibed since much of it was already off the govt balance sheets

  8. D K MCGREGOR
    Posted May 1, 2010 at 10:17 am | Permalink

    Can I draw your attention to the following article in the Birmingham Post , particularily near the end where remuneration levels are discussed. Before we start to look at cutting worthy capital expenditure , could we perhaps weed out the Grecian bonuses and overtime?

    http://www.birminghampost.net/news/west-midlands-news/2010/04/27/birmingham-city-council-could-face-1bn-bill-after-women-win-equal-pay-case-65233-26328507/

  9. Simon D
    Posted May 1, 2010 at 10:50 am | Permalink

    I agree. You should also go further by sweating capital assets and selling off surplus infrastructure.

    Once upon a time there was a Eurostar Terminal at Waterloo Station. Several years advance notice was given of the transfer of the services to St. Pancras. The new terminal then opened. You would have thought, given the huge lead time, that the moment the last Eurostar train left Waterloo the builders would instantly move in to implement the master plan for the new use of the old terminal. Not a bit of it. The old terminal (in prime Central London real estate) moulders empty and its only visitors are stray pigeons. I have not read any account of what it to happen to it. The rule should be that you give the fewest assets possible to public bodies because they don’t know how to sweat them.

    My favourite public sector vanity project is the ‘art work’ at the BBC redevelopment in Portland Street. Hundreds of thousands of pounds of license payer’s money is being wasted by public servants. All that will have to end if we ever get serious about paying down the country’s debt. It will be hard work – attending meetings with ‘creative talent’ is much more fun than running the core business in a cost effective way.

    • James Clover
      Posted May 1, 2010 at 8:24 pm | Permalink

      What is needed is a completely different frame of mind in which waste is considered with consternation. I cannot see that developing of its own accord. Only real penury will shock our masters into genuine prudence and thrift. Maybe a major collapse is near.
      A "Book of Waste" recounting these horror stories would run into many volumes.

  10. English Pensioner
    Posted May 1, 2010 at 12:07 pm | Permalink

    I'm sorry, but to me it's not only the Labour and Lib Dems who have a black hole in their spending plans, the Conservatives seem no better. All talk about reducing the deficit, but none talk about how the massive debt is to be repaid, which will continue to increase as long as there is any deficit.
    I suspect most politicians are hoping that the general public don't know the difference between a deficit and a debt and are assuming they are the same!

  11. Richard
    Posted May 1, 2010 at 12:09 pm | Permalink

    The central Labour argument on the economy – repeated by Gordon Brown on his interview with Jeremy Paxman – is that when private sector spending is low due to the recession the state must step in (and tax and borrow extra) to fill the gap. This argument appears to be supported by various 'Keynesian' economists who write to newspapers.

    Perhaps you could do a blog sometime to explain in simple language why this is nonsense and that the key to recovery is the return of private sector confidence, which can only come when state spending is clearly under control. Only then will individuals, investors and companies be confident that the future will not be a cycle of: tax rises; interest rate rises; inflation and currency depreciation.

  12. alan jutson
    Posted May 1, 2010 at 1:16 pm | Permalink

    If the number of Public service workers are reduced, and particularly Quango's abolished altogether, then we can sell off some buildings (or not re lease) as well, to bring in some income and reduce expenditure (rates, heat, light, power) at the same time.

    Given the above, office equipment could perhaps also be recycled to other Departments, who would normally purchase new.

    Aware that a miss match of office furniture can look a bit naff, but that is what many make do with in Private industry, where the biggest critera is, Will it do the job !!!!

    So much waste goes on in the public sector that it is sometimes difficult to believe.

    I am informed that a few years ago a local Hospital had a new reception (custom made) desk fitted at a cost of £60,000 only for it to be replaced 3 years later when a comprehensive refurbishment of the Hospital was completed, with another one.

  13. startledcod
    Posted May 1, 2010 at 1:39 pm | Permalink

    Every single Government employee considering any expenditure should decide whether the expenditure is desirable, necessary or essential. This test should be applied to everything from a packet of paperclips to replacing street 'furniture' to ordering police cars to quangos.

    As of 7th May only essential expenditure can be countenanced and, if challenged, the decision to spend must be justified. The Conservative plan to publish all Government expenditure (Does this extend to Local Government?) over £25k will allow every tax payer to challenge these decisions.

    One day, hopefully within a year or so, necessary expenditure will be permitted.

    When the deficit is under control then some desirable expenditure will come on stream.

    One of the keys to making this work is involving absolutely every public employee explaining that this display of individual rigour is one way of preventing compulsory redundancies.

  14. Colin Hart
    Posted May 1, 2010 at 1:59 pm | Permalink

    No doubt we will be told this will do untold damage to the construction industry. Tough.

    • ManicBeancounter
      Posted May 1, 2010 at 7:27 pm | Permalink

      Perhaps a relaxation of the planning laws, as hinted at by Cameron in the 3rd debate, will mean a shift to the private sector.

  15. Mark
    Posted May 1, 2010 at 2:30 pm | Permalink

    Mostly excellent points. This roads stuff is a bit trickier than it appears, however. Please bear in mind that the M6 toll profitability depends crucially on how many times they have to resurface the road during the 50 years of toll rights. That's why they have set tolls to discourage freight traffic, which wears roads out far faster than cars. I think they are hoping to get away with just one resurfacing over the 50 years.

    You can easily find estimates that a single 38 tonne truck does as much damage as 35,000 cars, or that road damage increases with the fourth power of axle weight. Factors like this may not be as obvious as the high effective interest rate under a PFI contract, but they are just as real. A toll road may simply accelerate the need to repair other roads – as is happening with the M6 non-toll.

    • alan jutson
      Posted May 2, 2010 at 11:19 am | Permalink

      Mark

      You make a very interesting and very telling point.

      Perhaps this is the reason why I have not seen any lorries on the M6 Toll, on the very few times I have been on it.

      From the Companies point of view, they are not getting the benefit of fuel tax and Road fund licence fees to help them repair the roads, so they charge the real cost for each vehicle type.

      • Mark
        Posted May 3, 2010 at 1:43 pm | Permalink

        They don't have to charge the real relative cost (that would be a minimum of £350 if cars were only charged 1p!). They only have to charge enough to dissuade freight traffic, which reckons cost in fuel, wages and time. In fact, one of the interesting features of M6 toll is that it's only used by any numbers when there is a standstill on the M6 itself. There is no attempt to maximise revenue through a cheaper off-peak rate. Charges are set effectively in monopolistic fashion, for when it is the only viable route.

  16. ManicBeancounter
    Posted May 1, 2010 at 2:56 pm | Permalink

    This is an excellent summary of how a sizeable reduction can be made in the deficit quickly. Two observations.

    1. The public sector capital spend differs from that of the private sector in the type of returns. Most public sector investment is for social returns, not financial. Most private sector invcestment is (with the exception of regualation compliance) with the expection of a financial return. The reason we have a structural deficit is the confusion of the two types in Brown's "Golden Rule".

    2. The "growing bureaucratic army" was not more of the same. It was the increasingly partisan, with only projects & people being "on message" getting recognition. The real savings will come from having a clear vision of what the government should be doing and allowing pluralistic solutions and methods of achieving that. Part of this should be serving the wider society, as opposed to spinning to be most liked by the general public.

  17. Paul from MK UK
    Posted May 1, 2010 at 3:59 pm | Permalink

    I do fear that after 13 years of being schooled in the "Enron plus" techniques of accounting employed by Gordon Brown, the civil service will find it very hard to adjust to the new reality regardless of the make up of the new government.

    For example:
    “If a project has a pay back of two years of less – if it can save more than its own cost in less than two years – then let it go ahead.”

    Give that task to the civil service and we greatly risk merely seeing a jump in the number of projects that predict "savings" within two years.

    Couldn't these judgements be made by volunteers of business men? Hardened by having to deal with the labour generated consequences of the recession, they would be far better qualified at making genuine cuts.

    • ManicBeancounter
      Posted May 1, 2010 at 7:24 pm | Permalink

      Perhaps higher standards of checking will work? In my own (private sector) job I review project and Capital Project Costs. You should not assume that all the civil servants will be so partisan and self-serving. Even if they are, it is in their interests to cut costs now, as delay will mean bigger cuts later.

  18. Steve Tierney
    Posted May 1, 2010 at 6:42 pm | Permalink

    As ever – great work John!

    In case anybody fancies it, we’re messing around predicting the actual General Election outcome on my blog at… http://www.stevetierney.org/blog/?p=1490

    I don’t want anybody just playing politics and predicting some nonsense they know isn’t going to happen. If you’re in the mood for that, please go somewhere else. But if you fancy making a genuine prediction, please come along. I’m collating the average guesses into a graph periodically and hope to compare the ‘average readership’ to the final result on Friday.

  19. Nick
    Posted May 1, 2010 at 6:51 pm | Permalink

    Are you doing the usual politician thing of being a hypocrite?

    You are all in favour of Crossrail because its government pork for your constitiuents.

    Nick

    Reply: I have pointed out that Crossrail may not be in my constituents' interests, depending on its impact on rail capacity from the west. Crossrail is now committed spending, but of course all rail schemes that are not contracted have to be part of the spending review that is urgently needed.

  20. Kevin Peat
    Posted May 1, 2010 at 7:34 pm | Permalink

    There are massive savings which can be made without affecting the British people one iota.

    There are massive savings which can be made which will benefit the British working people to a huge degree.

    But you're all complicit in shafting and undermining us, aren't you.

  21. Alex Sabine
    Posted May 2, 2010 at 3:26 am | Permalink

    In general I agree that much capital spending will need to be deferred or cancelled, given the scale of the fiscal crisis. You're also right that the government undertakes plenty of unnecessary or unproductive capital projects.

    However, Tory and Labour governments have traditionally preferred to cut productive capital investment rather than unproductive revenue spending for a more cynical reason: because the consequences – in dilapidated hospitals, school buildings and crumbling transport infrastructure – often don't become apparent for several years, while the effects of squeezing things like public sector wages/employment, introducing or raising charges or cutting services are felt by real voters pretty quickly.

    Hence, cuts in capital spending formed a big part of previous fiscal squeezes in the UK and helped create the poor infrastructure the country still lumbers under, while current spending has very rarely been successfully controlled for any sustained period.

    Of course, Gordon Brown used to lecture everyone about this – hence his Golden Rule designed to protect investment (and to permit larger deficits than would otherwise be thought sensible). But his own government's plans (if they can be dignified with that term) envisage huge cuts in capital investment. When he says Labour will maintain 'investment', what he really means is that they will go on spending but take the axe to investment.

    From what I can tell, the Tories' plans for high-speed rail will entail significant public capital spending, so I doubt they will be able to go much 'further and faster' in the next parliament.

  22. no one
    Posted May 2, 2010 at 4:01 am | Permalink

    http://thejobbingdoctor.blogspot.com/2010/05/what

    not all nhs capital spending is worthwhile

  23. Martyn
    Posted May 2, 2010 at 8:59 am | Permalink

    Why are there so many Ministers? There seems to be a Minister for every subject under the sun, each needing support staffs (permanent private secretaries etc) at who knows what cost? Someone – preferably an experienced business person – should ask of each Minister "what value do you add to the economy"? If the answer is little or none the post should be immediately abolished.

    Quangos? In just one EU-inspired region of what was once England, in the South East (SE) there is the SE England Development Agency (SEEDA), Tourism SE (TSE), the SE Economic Delivery Council (SEEDC), the SE England Intelligence Network (SEE-IN), the SE Centre for the Built Environment (SECBE), the Government Office of the SE (GOSE), the Regional Economic Forum (REF), the SE Regional Select Committee (SERSC), the SE Regional Grand Committee (SERGC), the Learning & Skills Council SE (LSCSE), the SE Partnership Board (SEEPB), the SE England Council (SEEC) and the SE Leaders Board (SEELB).

    Multiply this (not exhaustive) list of quangos by 8 to get an idea of what Labour has imposed on England. Someone should ask “what value do these undemocratic, expensive and unproductive regional bodies add to the economy”? Again, if the answer is little or none get rid of them and put the money saved to a more productive use.

  24. John Bowman
    Posted May 2, 2010 at 11:17 am | Permalink

    Sell off healthcare provision. It would release an enormous capital sum from sale of land, buildings and equipment, get a huge payroll and its associated pensions and NIC costs off the Public accounts.

    It would encourage private – probably inward – investment in a run down service and ensure it became a patient led service not a product and supplier led service.

    Next the schools – same reasons.

    It would remove both areas, health and education, from the political arena no longer issues over which the parties can have their election time micturating contests.

  25. Lindsay McDougall
    Posted May 2, 2010 at 5:23 pm | Permalink

    The 2010 budget report gives the following breakdown of public expenditure for 2010/11:

    Gross capital expenditure £60 billion (already £10 billion less than in 2009/10)
    Debt interest £43 billion
    All other current expenditure £601 billion

    Don't you think that you are shooting the wrong fox?

  26. cheap ghd
    Posted May 7, 2010 at 9:52 am | Permalink

    I look forward to the EEDA being cancelled too.
    This is a small town in the middle of nowhere. Imagine the waste in, say, Leeds!

  27. Bernard JUBY
    Posted July 19, 2010 at 10:51 am | Permalink

    Is scrapping Magistrate's Courts a means of cutting costs or is it a disguised form of hurrying in the Code Napoleon as dictated by Brussels?

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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