Category: Blog

When waste, needless programmes, stupid jobs, pointless regulation, poor efficiency and rampant feather bedding are rife in an organisation, cutting costs is not only easy but rapidly makes the service better.

In the Sunday papers there was talk of having to cut 10% off total spending. That would not be difficult, nor need it be painful. As an MP who spends more than a third less than the average on running my office, if I had to cut another 10% that would just mean cancelling two of the three editions of the free newspaper each year, hardly a painful cut. Why haven’t I done that already you ask – because I promised to send one out each year when last seeking election, and have more recently consulted on whether I should cut it or not and been told No. I will propose no such spending commitment at the next election, given the financial climate.

In the 1990s when I was a Minister public spending was under much better control than today. The system was leaner and more efficient. Nonetheless,, coming in from running a cost conscious large industrial quoted company, I was shocked by just how much waste and inefficiency there was. I had far too many staff and far too big a budget in each department, and set about in each case getting it under control.

The Day One diary in a new department for any Minister has to include:

1. Impose a staff recruitment freeze – any new person recruited from otuside should require personal Ministerial approval following a submission showing why they cannot be appointed from within and posts removed.
2. Impose a freeze on new consultancy contracts. The Minister should say any request for him to give an answer on a new proposed consultancy contract will take him at least as long as it takes the department to answer the average letter from a member of the public. The answer will usually be as helpful!
3. Cancel most of the newspapers, magazines, tv subscriptions and other similar bought in items for the private office, and then ask senior officials to review their purchasing of the same. Tell them to run down their often huge stocks of paper, computer supplies, pens , paper clips and the rest.
4. Cancel all foreign trips and say you are going to sort out the mess at home first – unless you are in the Foreign office or helping the export drive.
5.With colleagues announce that no new recruit – if any are allowed – will be able to join the existing generous pension scheme.They will be offered a money pruchase scheme instead with a defined employer contribution.
6. Put into the diary a series of meetings to review all main areas of cost, with the purpose of closing down the inessential and making the necessary more efficient.
7. Call in all CEOs of quangos and related bodies, review their corporate plans, set them cost reduction targets or prepare them for abolition of their body.

When I was responsible for Companies House as a Minister, we had a typical public service efficiency and service quality problem. When I took it over there was large backlog of unopened post. This meant large amounts of information about companies that should have been on file was not available to the public, making it a very poor service. I was told we needed more staff to open the post.

We appointed a new CEO. I then discussed how we could remove the backlog with no extra staff. Our agreed approach was simple. We set the workforce a target to open susbtantially more post than they had been opening and filing each day, and said they could go home when they had achieved the new target. They started going home early, and the backlog fell sharply! We had probably underpitched the efficiency gain we knew they could achieve, but both sides were happy and the taxpayer was saved a big additional bill.

We need to do that or variants of it on a huge scale across the public sector.

Hazel Blears says the government is not getting its message across.

On the contrary, Hazel.

The last few weeks have been brilliant for letting the public see the true face of Brown’s regime.

The message of authoritarian control, stifling of freedom, class war, attacks upon success, feather bedding the public sector elite and the air of unreality about government borrowings and costs have all come across so well.The nasty politics, making public policy a trap for the Tories each time has proved instead to be a boomerang. Now we have a civil war between Labour MPs and Ministers as well.

Please keep up the good work. Let’s have more calls for loyalty – a sign of a weak regime. And let’s have more personal agendas, so we can see what they really think around the Cabinet table.

It’s not the dividisions that will bring them down – they are quite healthy in the circumstances. Divided parties do get elected, as Margaret Thatcher’s Tories and Blair’s New Labour showed. After all for 10 years we had the Chancellor running an anti government against Blair. It’s the dreadful economic results, and the oppression of our freedoms that will bring them down. It’s the attack on enterprise, the trashing of great institutions, the detention without trial, the decision on the Gurkhas, the incompetence of the Home Office and above all the lurch towards national bankruptcy.

How much damage is this crisis going to do? If the downturn is contained to a loss of 5% of National Income as the government hopes, that means a loss of £1250 for every man, woman and child in their share of National Income, or £5000 for a family of four. We will feel grateful if that is the full extent of it!

Worse still, the economy is much damaged for the longer term. It has too big a banking sector which is unable to grow. The nationalised zombie banks are in no state to continue to expand and create more jobs. They represent a large chunk of our financial commitment, towering over the state and the National Income.

A bloated public sector which will have to be made less costly and more efficient represents too large a portion of our activity.

The national debt burden will be collosal. Paying interest and repaying the debt will take priority over creating more jobs and building more business, especially with Labour’s new penal taxes on talent and enterprise. The higher taxes on gains, income, pensions and small business will act as a deterrent to the able and enterprising to create the jobs and new ideas here.

An economy which supercharged the growth with debt will not longer be able to do that. Nor will it keep inviting in so many new workers through a wide open borders policy. Government will impose quotas and controls, whilst many will no longer want to come as there will not be the jobs available.

Near the top of the boom Brown’s Treasury told us by some miracle they had shifted the trend rate of growth up from the usual 2.5% the UK had acheived post war, to 2.75%. In the Economic Competitiveness Review we challenged this and produced a paper saying the true trend growth was below 2% now, taking into account the debt effect and the damage done to competitiveness by a range of their actions and inactions.

So what is the trend rate of growth?

Current Treasury figure 2.75%

Less lower population growth -0.4%
Less impact of larger inefficient public sector -0.2%
Less debt effect -0.3%
Less financial sector distortions and losses -0.3%
Less incentive effect of new taxes -0.2%

Possible new trend rate of growth after recession 1.35%

I will be doing some more work to develop this model. Every 1% off the growth rate means the average family of four being worse off by £1,000 a year for each year of the slower growth. The losses compound up to large numbers quite quickly, as every year adds another shortfall of an additional £1,000 in their share of National income.

Under new “liquidity” rules the main banks are going to have to lend loads of money to the government. Convenient that, for the government, at a time when it is short of a pound or three.

Does it make any sense for the banks? Does it help strengthen them and get them closer to be able to lend to others? No, of course not.

I realise banks are very unpopular. I understand that the idea that they need to make more profit is anathema to many bank haters. However, the simple truth is that if we want stronger banks that can lend money to individuals and companies that need it, we need more profitable banks.

Indeed, even bank haters would agree that where the state owns large banks, we could do without collosal losses on the scale we are growing used to. Most surely agree RBS and HBOS need to be more profitable. If they do not become profitable and build up their reserves, they will remain as public sector zombie banks, unable to play their proper role in the private sector economy and lend to those with good prospects.

If the banks were allowed to lend more at current lending rates, they could make good money. Their antennae are much better attuned to risk, and the shortage of bank lending means they can charge more for less risky loans. So far so good. It’s a necessary evil to get things going again.

However, the banks are being told that instead of lending their money they need to put a lot more into “liquidity” which means lending it to the government. They will be forced to do this on a large scale. They will have to lend at low rates of interest, making it unprofitable business bearing in mind the high costs of their capital these days. The banks, strapped for profit, will have to lend to the government at a loss if you take into account their cost of raising and servicing new capital.

That is not the way to strengthen the banks, or return them to health. That is a cheap way to finance the government deficit, at the expense of a dear way for the taxpayers to be running their banks. In the end taxpayers pay both lots of bills. So who do the government think they are fooling?

First came the £5 billion per annum tax. Then came the regulation. Pension funds were crippled. Most private sector companies closed them to new members. Some went on to stop future contributions from existing members. Some went bust. Some pension funds needed so much extra money from their sponsor companies they threatened to bring the company down.

Now the government and the Regulators see pension funds as a ready source of money for the government to borrow. The more mature the fund, the more they demand that the fund “matches” its liabilities by buying government bonds.

How can they believe that a government bond offering an interest rate of between 2% and 4% per annum depending on the maturity date can possibly keep pace with pension requirements?They do not know for sure how long people will live, needing the pension payment. Nor do they know how much inflation governments will unleash as they get out of the present crisis. You cannot “match” liabilities which go up with wage or price inflation by buying low yielding fixed income government bonds.

All you can be sure about is that if you buy government bonds today you will at best get a low return. If you hold them to repayment you will get your 2 to 4% per annum, and a capital loss on repayment. If you sell them before repayment you might make a little more, or you might lose more if interest rates rise. If we have a funding and sterling crisis you could lose a lot at market prices.

The truth of the “matching” doctrine is simple. It’s a way of getting more money into the government’s coffers, and it is a way of keeping companies on the pensions rack for longer. There will be more casualties as a result. Everytime more pension funds get into trouble, so the demands on the Pension Compensation Fund rise. The Regulator in turn imposes a bigger tax on the successful funds, making their task more difficult! No wonder most companies have given up on final salary pension funds. Only twelve years ago we had the best pension scheme in Europe by a mile, and many people could look forward to a pension based on their final salary.

Today the issue is when will the government wake up to the unaffordable promises being made on an ever increasing scale in the public sector? When will there be greater equality of treatment between public and private? When will the public sector rich list have to live in the real pensions world that arrived in the private sector some years ago? It just shows how much damage the wrong kinds of tax and regulation can do. Never have pension funds been so regulated, and never have they been so weak.

The government has had another dreadful week. Yesterday in the Commons was a farce. To avoid losing another vote the government accepted a cross party proposal to delay changes to the expense regime until we had the full report of Mr Kelly, recently appointed to sort it out. Despite that, they went on to vote through some changes. Mr Kelly may well now come to different conclusions, challenging these interim measures.

Only one of those will reduce costs, which I would have thought should be the main aim. That was the proposal to prevent MPs in London from claiming the second homes allowance. The changes to employment of staff may make the whole system dearer, as they seem to want to prevent people finding out how much each MP spends on staff, removing the incentive to keep your staff costs down which exists in the present system. The requirement to present receipts for small sums is fine but will make little difference.

The underlying message this May day is the government has lost its grip. Some foolishly thought Mr Brown knew what he was doing when he nationalised the banks. That will turn out to be his most ruinously expensive decision. He is now proving that having lost control of the big numbers, he has little more grip over the small but sensitive numbers on how much his MPs spend.

Mr Obama blames the bondholders for Chrysler’s problems. In his world people should save, lend their money to a car company, and then convert the loan to a gift. Apparently a company has a right to pay its executives too much, to give generous benefit to its employees, to sell too few cars and then to get a donation from the lenders.

He should stay out of the restructuring. It makes him look weak and cross when they don’t all do what he says. Putting Fiat together with Chysler is putting two weak companies together. That does not normally make a strong company. Chrysler either has to come up with cars people want to buy, or make major reductions in capacity and cost. There is no third way or easy route to riches. Mergers are fashionable amongst governments. They are also anti competitive, put off the day of reckoning, and make the companies too large to fail.

If people are keen to buy Fiat cars, Fiat should negotiate with US dealers and set up a dealer network. If Chrysler think they could make and sell Fiat cars at a profit they should licence the models they think can work. If Fiat think a merger is the way to US taxpayer subsidy they may be disappointed. If Chrylser thinks Fiat has all the answers on how to sell more cars in the USA they are in for a surprise.

Yesterday I spoke to someone running one of the smaller banks in the UK. He told me he lent less than he collected in deposits, for prudential reasons. He said he currently offered 2-3% on deposits, depending on size and length of time people would leave the bank with their money. He lent out at say 5-6% to reasonable prospects. They stopped following the Bank of England rates when they moved them below 2%, as they could not see how they could attract or maintain deposits if they followed the rate down.

It all made perfect sense to me. What a pity the authorities cannot understand this. I suppose they are setting their rates now with an eye on how much government stock they have to sell. In the real world depositors need a return, and banks need deposits. The UK authorities have not been in control of money markets or rates for almost two years now. Their destructive lurches in interest rates – first too low, then too high, now too low – have done damage. Today any sensible bank just ignores them.

Yesterday I heard an account of where we are and what we need to do next.

In the popular mode of self assessment I had hoped we would be told the financial establishment were “gutted and dissastisfied” with their performance so far. Instead, our spoeaker blamed the bankers, told us the Regulators had to do more regulating, and advertised the attractions of investment in UK government securities.

He did not give us all the usual regulatory warnings. We were not told gilts could do down as well as up. We were not told to seek independent advice, as gilts may not be suitable for all investors. We were told they are “safe”.

I guess we are going to hear a lot more of this from the authorities. I understand the Treasury has a few to sell, understand the Bank is rather long of them, and understand the FSA is recommending them to banks on an heoric scale. If you look at most of the gilts available in the market, the one thing you can say for sure is you will make a capital loss on many of them if you hold to repayment by the government, as many are priced at more than £100 per £100 of repayment. It is true you could make a profit in the shorter term, if government and Bank buying power is used to push their prices up some more, and to force interest rates down further. It is also true you could lose money if markets worry about the volume of issuance and the extent of the borrowing requirement.

I would expect to hear from a measured public official comment on how the authorities plan to get us from a position where gilt prices are heavily influenced by a large government buying programme, to a position where the authorities can offload them again and sell the large volumes they need to sell. I want to know how the authorities think they can curb the mighty and rising deficit. I wish to hear how they can in future set interest rates which stabilise the economy, instead of continuing on the ruinous roller coaster ride we have suffered in the last decade. I wish to be told how they will start to make the right calls on banking cash and cpaital, not that they are going to intrude into an ever wider range of detail in banking in lieu of making the big judgements they are paid to make.

So, in the spirit of self examination, I am “disappointed but not surprised”.This site has offered advice to set interest rates, government borrowing and spending and banking rules in a way which would stabilise instead of destabilising the economy. That does not make me “pleased but not satisifed” with its performance. I remain “angry and unhappy” because the financial establishment has been so determined in the UK to make the cycle more violent, whatever we say.

Expect representatives of the public financial establishment to act as gilt salesmen from here. Pity the poor banks and pension funds which will be made to buy these stocks, locking into low yields after a long bull market in bonds. If all goes well they will earn 2-4% per annum interest on them. That’s not enough to fill the black holes in their accounts. If all goes badly they will be showing some unpleasant capital lossses at market price.

The Commons has asserted itself against the government. The hapless Gordon Brown and hopeless Home Secretary lost the vote on their treatment of the Gurkhas.

It is another sign of just how much authority the Prime Minister has now lost.

Just to remind you, at the last Election the British people voted for 356 Labour MPs, 198 Conservative MPs and 62 Lib Dem MPs. Labour should not be losing votes, if they had a sensible leader!