Month: January 2011

 

                We mainly hear discussions of the cuts to come in the public sector. The general feeling is the private sector had its bad time in the slump, wheh jobs were lost, pay frozen and short time working was common. Manufacturing has been recovering for almost two years now, with new jobs, full time working for more employees, and even some modest increases in earnings. The impression given in some of the media is that  now the public sector is suffering much more than the private sector.

              If, however, you look at “real terms” figures as the public sector likes to do, the picture loooks rather different. Private sector earnings are rising just a little above 2%. Retail price inflation is running at 4.8%. Total public spending is 7% higher than a year ago (May to November 2010).  On that basis, overall public spending since May 2010 is up 2.2% in real terms, whilst private sector earnings are down by 2.5% in real terms. This is still a wide gap in favour of the public sector.

             These figures relate to the end of last year. As we move into 2011 the hit on the private sector is bigger, as the 2.5% increase in VAT kicks in – an increase of 14% in the rate.  So in the first quarter of 2011 the squeeze on the private sector is getting tighter.

             Next year total current spending in the public sector will go up at a rate below the current rate of general price inflation. However, this need not translate into real terms decreases. If the pay freeze for all but the lowest paid works well, and if the initiatives to buy more economically also succeed, it would be possible to sustain  no real overall reduction in public spending. There will,, of course be cuts in individual areas reflecting general public sector priorities or poor management.

            Both sectors are in this together, but so far the private sector has been hit much  more severely than the public sector. The private sector has to get out of its own debt, and is being asked to pay more tax  to help the public sector reduce its appetite for more debt. There is no pain free way out of an overborrowed condition.The public sector does need to control its own costs better and contribute to the task of bringing the deficit under control. The private sector cannot take further hikes in the tax burden. We need tax policies which help enterprise and foster growth from here.

 

            Mr Lansley’s reforms  revolve around giving the GPs a much bigger role in the management of our Health Service. They will succeed if he enthuses enough GPs to use the new freedoms and  powers they will enjoy. It will go through with little improvement if GPs grudgingly accept the reforms but do not wish to make them work. It will go badly if enough GPs unite to fight the very reforms designed to give them more interesting jobs with more scope to do well for their patients.

           The first challenge Mr Lansley faces is trying to ensure that the big switch from expenditure on administration and layers of management to more spending on health care  provision takes place. Stripping out regional and national administration and controls, and removing PCTs should cut costs. It is important that the new GP commissioning structures are kept within sensible bounds of size and cost so they do not absorb all  the savings. Mr Lansley knows he must avoid big pay offs for those losing their jobs, only for them to reappear elsewhere in the NHS, perhaps with a higher salary.

           The second task is to ensure the new GP commissioning has at at its command the necessary information and IT support, without embarking on a massively expensive new centralised system that takes too long and is way over budget.

            The third is to resist the temptation to intervene regularly from Whitehall when the predictable local rows and worries emerge with the decisions the GPs are making. The system might result in some hospital or service closures, where GPs and patients opt for a different provider or way of treating something. The centre has to stick to the line that this is a matter for local decision, and all worthwhile services and institutions should survive because local GPs will wish to use them.

             The fourth is to carry enough of the union membership with him. They will object to the challenge coming from independent and charitable providers, and can do damage from within the public sector run part of the service.

               It is a complication that these reforms have to go in at a time when budgets will be rising less quickly than at any time over the last 30 years. That is why success in cutting overall admin costs is vital, and why the new system needs to produce a variety of providers offering choice, higher quality and lower cost to work well.

 

               This week the changes to the NHS have at last come centre stage in the UK political debate. I am starting to receive emails disagreeing with  the government’s plans.

               There are two common criticisms of the Lansley proposals which I need to dismiss before we can begin intelligent discussion of them. The first is that a very radical reform of the NHS was not mentioned in the Manifesto or before the election, and has suddenly been sprung on the country. The second is that the government’s plan is a way of privatising the NHS.

             The NHS was treated differently to other areas  by David Cameron between 2005 and 2010, because he personally relied on it for his disabled child, and wanted to reassure people that he believes in it. He made Andrew Lansley Shadow Health Secretary and guaranteed his job for the whole of the last Parliament, unlike all other Shadow Cabinet members. He instructed Mr Lansley to immerse himself in the culture and problems of the NHS, and to come up with a way of improving it. He protected the NHS from any future cash cuts by offering to increase spending on the NHS by a little more than prices each year of  this Parliament.

           Mr Lansley energetically got around the NHS over the last five years, and produced detailed policy papers in opposition, setting out the direction of reform he wished to undertake should he become Health Secretary. These papers received very little publicity.  The Manifesto itself confirmed a radical plan for changing the NHS. It said:

          “We have a reform plan to make the changes that the NHS needs. We will decentralise power, so that patients have a real choice. We will make doctors and nurses accountable to patients, not to endless layers of bureaucracy and management”.

             The plan always included the central proposition that GPs should buy in the hospital care and other services their patients needed, removing commissioning from PCTs and phasing them out. Some of us spent time in the election explaining to the few people interested how these radical plans might work.

I also wrote a website piece explaining that the media were wrong to think the education plans were radical and the health plans were not. I suggested that the NHS reforms would prove to be bigger and more important than the schools plans. It is quite untrue to say there was no warning that change was afoot, and untrue to think the main outlines of the reforms were not explained before the election.

Nor is it true to say the aim is privatisation of the NHS. The crucial promise of the NHS that is very popular in our country is the promise that everyone has access to care, free at the point of use, based on medical need.  The Manifesto made clear that that was fundamental to the Conservative party approach:

“As the party of the NHS, we will never change the idea at its heart  – that healthcare in this country is free at the point of use and available to everyone based on  need, not ability to pay”

The NHS has never been a fully public sector owned and run service. From its foundation, GP practices have remained as private businesses, contracting with the NHS to provide NHS services. They often provide private services as well, from innoculations and other paid for items of service through to dispensing and charging for presecriptions. From its opening it has bought in large quantities of drugs from private sector for profit companies. It has put work out under contract to private sector companies of all kinds, from catering and cleaning through to specialist nursing and clinical services. Labour expanded the private sector role, finding some private sector businesses could offer higher quality medical,nursing and clinical service for lower cost.

The Lansley reforms build on this mixed base of provision. Again, the Manifesto was very clear. It said:

“So we will give every patient the power to choose any healthcare provider that meets NHS standards, within NHS prices. This includes independent, voluntary and community sector providers.”

It went on to explain

“We will strengthen the power of GPs as patients’ expert guides through the health system by

giving them the power to hold patients’ budgets and commission care on their behalf

linking their pay to the quality of their results

putting them in charge of commissioning local health services”

I hope following this I will not receive more emails and letters suggesting the Conservatives failed to explain their plans before May 2010, and no more suggesting the aim is to undermine free at the point of use. It is important to grasp that the NHS has never been an entirely state run operation. Tomorrow I will look at the challenges faced by Mr Lansley in implementing all this.

The UK debate as always remains distorted by people who do not understand the numerous hybrids we have between full private sector for profit competitive provison on the one hand, and full scale free at the point of use with all assets owned by the state and all employees employed by the state at the other.

Some say the Uk public finances were in good shape if we ignore the costly bank interventions and special measures needed for the Credit Crunch. The figures as published by the Office of National Statistics do not support that view.

Public sector net debt rose from £323 billion in 2001 to £534 billion in 2007 before the crisis hit. During the surge in borrowing during  2008-2010, taking stated public debt to £850 billion and above,  the financial interventions only added £20 billion to the large borrowing  totals, to pay for the shares bought in RBS. Lloyds and Northern Rock, and to finance the Special liquidity scheme. This financial year so far the government has borrowed an extra £104 billion, without adding to its financial interventions.

The balance sheet impact of the take overs was much larger, but this will only be reported officially in the January government debt figures. The ONS has published provisional figures, suggesting you should add £1.5 trillion to stated public sector debt to allow for the balance sheet liabilities of Lloyds and RBS. Northern Rock and Bradford and Bingley add £150 billion to the  national balance sheet. These extra liabilities are of course offset by assets.

There are also £330 billion of contingent liabilities, based on guarantees over assets which may prove to be worth less than estimated.

The large increase in government borrowing came about through spending more than it raised in taxes over a long period. The financial interventions will have swollen both sides of the state’s balance sheet, as the January figures will show. At least we will now have realistic official figures for the state of the UK balance sheet, after months of no official figures for the banks taxpayers own.

The sooner the government starts shedding banking assets and liabilities, returning them to the private sector, the better.

 

                 A government trying to manage an economy is rather like a child trying to play that game of placing a number of small ball bearings into a series of slots on an  enclosed board. The game proceeds by nudging or shaking the board in different directions to try to tempt each ball into one of the slots. If you nudge too hard or in the wrong direction  you dislodge some of the balls you have already placed in the right  holes. Success depends on  administering the right series  of shocks in the right directions to complete the task. Too much force will wreck it. Too little will not achieve it. There may be some way of calculating the right forces, but in the real world it comes down to experience and judgement, to trial and error.

               So it is in practice with managing the economy. The government does not have the luxury of just getting one ball into one hole and declaring success. It needs to keep inflation down. It needs to curb the deficit. It needs to preside over decent growth of output. It wants real wages to go up, without inflationary wage rises.It wants more investment and saving, and fewer imports. It’s a lot of balls to juggle.

                 Time was when government simplified things. They decided there was a  misery index. If you added the inflation rate to the unemployment rate you had the index. If it rose too high – into double figures – too many people would  feel badly off and the government’s popularity was at risk. The last government gave up on that and declared the Credit Crunch was to blame.

                           It’s still a good start to keep the unemployment and inflation rates down. A combined index of under 10% is an exacting target which would make people feel better. However, it’s not enough. The government does have to hit targets to get the deficit down, and need to keep the growth rate up. There are at least four balls to juggle.

                        They are related. If inflation goes too high, curbing it will damage the growth rate and could boost unemployment. If the deficit is not brought down, that too can drive up long term interest rates and cause slower growth and less employment. Higher inflation with wages under strict control cuts spending power and therefore reduces domestic demand.

                        Last year public spending was still going up, the deficit was too high, inflation was rising. The good news was growth resumed, job creation picked up and unemployment started to come down.  This year, to keep growth and job creation going, the authorities have to get better at hitting inflation and lower borrowing targets. If they don’t the nudges to sort them out could dislodge the areas that are working.

 

              There has been considerable interest in my factory visit last Friday. I am still thinking about it. Like a great sporting achievement, the pleasant experience lives on in my memory.

                There were two moments  above all in the visit when I realised they were very good. The first was when I heard how low their error rate had been in recent weeks. At times they run at zero defects. The second was in some ways more revealing.

                 As we walked around this spotless factory, where the  fluids were well contained behind screens and there was no usual smell of metal and oil, I noticed three pieces of waste paper on the floor. In that clean room style environment they looked out of place. I bit my lip instead of mentioning them.

                  I need not have worried. The Manager picked them up when he saw them. He studied them. He told me where they had come from. He said he would send them with a short memo to the manager responsible for the incoming trays of components. They had fallen off the side of the component trays when they were inverted to show they were empty and needed replacing. He would ask that manager to fix the problem so they could not fall off the trays in future.

                I was impressed. That action will not make the factory more productive. It will make no difference to the figures. It just showed that if you want to be the best no level of detail is too small. Nothing need go wrong. There is a way to fix everything. No recriminations, no shouting, just a polite request to keep the factory tidy.

                When I in the past have helped turn factories round I have found that cleaning them up is always a good first start. Bad factories have too much stock and work in progress littering the floor. Clear it, and you reduce the working capital costs. You make it easier to operate without the clutter. You cut down accidents as there is less to trip over. You reduce the faults from using damaged components that have been moved and left out for too long.

                  Clean the windows and remove barriers to natural light flooding in. That will cut electricity bills and cheer people up. Contain all fluids. People should not have to work in a sea of oil. If there is oil on the floor it is a hazard, and it is wasteful. If the factory is full of old cardboard boxes, bits of wood and other packaging materials from incoming components, put in a proper recycling and reclamation system, and have a place to hold such materials. Clean and re-use fluids where ever possible.

                 The joy of these techniques is they create a virtuous circle. A cleaner environment raises staff morale. It gives people something to be proud of. It cuts waste, which is now expensive to dump. It can lead to designing some of the packaging out of the process, to reducing the number of times an item is moved and held, and to faster line speeds. If you get it right first time you make more money and can pay better wages.

                 These same techniques can also be deployed in clerical operations, using computers to help cut error rates in processing paperwork. Clean green and lean needs to transform more of  the public sector, just as surely as it has modern manufacturing.

 

              For more than a year inflation has been well above target. It rose to nearly  double the 2% target last month, whilst RPI inflation is almost 5%.

              None of this should come as a surprise to the MPC members. After all, some of us have been forecasting this for more than a year, warning that there was bound to be a prolonged period of above target price rises if  the Bank kept interest rates down so low and  created more money, driving the value of the pound down.

              It is difficult to believe that the hand picked economists on the MPC were unaware of these forecasts, or unable to see what was happening to the pound, to world commodity prices and to public sector taxes, fees and charges. So it seems more likely that the MPC have been running their affairs with a different end in  view. It looks as if they have given greater priority to helping secure more growth and recovery, than to keeping prices down.

            This should require a change of requirements imposed by Parliament and the government on the Bank, and a change of reporting based on new targets. If the Bank’s main concern is to issue enough money to avoid  slow growth or double dip, let’s have that as a target, measure it, and hear from the Bank how they are going about it.

            The constant question now to those who argue for higher official interest rates is Why do you want to damage the recovery? If you ask why they think this would be the result, they tell you that higher rates would reduce demand, as borrowers have to pay more interest and therefore have less to spend.

              It is not quite as simple as that. Many borrowers are on fixed rates. Most businesses and many  mortgage holders are already  paying rates far higher than the 0.5% official rate. Meanwhile savings rates, also higher than the 0.5% , are nonetheless depressed. If rising official rates took savings rates higher as well, then savers would have more money to spend.

               We should not assume that all  borrowers have a bigger propensity to spend than savers. Some borrowers are using the advantage of low rates on floating rate debts to accelerate repayments. In  other words they are saving more. Many depositors are on modest incomes. They would want to spend extra interest if they earned it.

                Traditionally raising interest rates does tighten money, so that should slow an economy. However, when you have as damaged a banking system as we have with as little new credit for business as we see, the official interest rate is not having such a big impact on the outturn. The government and its banking regulators should be trying to find ways of allowing a bit more credit growth in the business sector to fuel the recovery. This is not mainly about the interest rate. It is about regulation of cash and capital.

               The best way of taking some inflationary pressure off is to allow a modest move up in the pound. Indeed, in the last few days when markets have wondered if an interest rate move is closer, sterling has risen. It appears that higher interest rates would help. It is true exporters would not have such advantageous prices, but they would get some compensation from cheaper imported raw materials and components.

                 What the MPC may come to realise is that at a  certain point rising inflation is self defeating. If wages remain under strict controls and inflation rises, there will be a sharp squeeze on living standards and less spending power as a result of high price rises. If wages started to rise to catch up with prices, we would be into a difficult  inflationary spiral.

                 In a year’s time some of the pressure may be coming off. When VAT and other public sector fees and charges drop out of the rising numbers it will help. If at the same time Asian inflation is coming under control, so will that.  We still have to get there. The VAT rise will be in next month’s figures. So will the higher petrol prices. That fuel tax moderator might come in handy at taking some of the shine off the large price increases at the pumps. The Bank, as always, is in danger of doing too much too late. Sometime this year it might  fight last year’s battle against inflation which it has already lost.

 

                Last week I went to a working lunch with experts from France and the UK on the Euro. I am telling you this so UKIP supporters can add me to their list of apostates who sup with the other side!

                The view from the continent is very different. They see the Euro as the central political project, the core of their plan for full European integration. They relish the thought of using this crisis to strengthen common economic governance. The rows with Germany are not over whether  to have more integration, but over how and to what end they should do this.

                I asked them how they thought the Greek deficit could be brought down, given the sluggish performance of that economy and the squeeze being administered both fiscally and through the common money policy. Their reply was simple. They told me that Greece has a huge black economy. All that was needed, they opined, were much higher degrees of financial surveillance over all resident individuals and businesses. Hey presto, the tax revenue would roll in and the defcit would tumble. France also last week reminded Ireland that it needed to raise its corporation tax rate, mistakenly thinking this would increase revenues.

                      They are doubtless right that there are rich Greek individuals and corporates who are shy about sharing all their success with the tax authorities. Whether more intrusive surveillance will turn them all into law abiding high taxpayers, or whether it will push more of them offshore, remains to be seen. It is the EU mindset that the crisis of the Euro can be solved by higher taxes, and that these higher taxes can largely fall on those with the broadest shoulders.

                          Meanwhile 13,000 Non Doms left the UK in 2009. I wonder how many rich and tax shy will be leaving Euroland as the Inspector comes to call? Many European governments would like the popularity of Robin Hood as they take from the rich and give to the poor. Unfortunately for them, EU governments also employ the Sheriff of Nottingham, so they may find it more difficult to pull off what my French contacts thought was inevitable, obvious and desirable. Meanwhile, the markets stalk the weaker currencies, forcing last week the ECB into buying  bonds  itself. How long will its purse prove to be? Will the Germans turn a blind eye to the build up of risky assets  at their common Central Bank?

               These democracies seem intent on testing the proposition that there is  no limit to how much tax revenue they can extract from their populations. They see no threat to the revenue from higher rates and tougher enforcement. They see no political challenge coming from a tax led squeeze. The Euro comes with  large economic costs attached. To my contacts it was right and inevitable, worth every cent. I guess the people I was talking to thought it would be others picking up the bill.