Today we see figures for the state of the public finances over the last financial year, 2010-11.
Current public spending is up by 5.1%. Tax revenues are up by 6.9%. Additional Public Sector Net borrowing after financial sector interventions falls from £156.5 billion 2009-10, to £141 billion 2010-11. In other words every man woman and child owes £2350 more this April than last April if you share the government borrowing out equally.
You could not make it up. The EU is busy lecturing all its member states to get their budget deficits down. Well they are not always wrong. They are telling states to cut spending and raise more tax revenue. At the same time they want them to pursue a growth strategy, which needs lower tax rates, not higher. So why on earth are they at the same time demanding a higher spending budget for themelves?
Surely as they demand or impose austerity on struggling Euro members, they should be taking the lead and pruning their own budgets? It would be good if they showed the way, by proposing an eye catching 10% off through efficiency savings and a smaller overhead. Even better if they proved they do now believe in subsidiarity and local decisions, by offering to cut out whole programmes. Why not end most of the agricultural programme and leave that to individual member states, who could achieve more for less? Why not end the EU’s programme of overseas aid, and let states do their own thing in the parts of the world they know best? And why not repatriate fishing policy whilst they are about. it. That would make them popular for once in the UK.
Given the scale of the financial crisis being hurled at the EU it is time for radical reforms and brave departures. It is time for the EU government to give us a lead. They say they mean it when they urge lower deficits and lower spending. Surely then they need to pioneer, trail blaze, blast a way through the EU satrapies themselves. Then we might believe them when they say the way out of this crisis is better housekeeping.
They should see the growing restlessness of electorates around the EU. Many more people are coming to realise there is no more money. There are limits to how much Germany, the UK and France can finance, limits to how much subsidy can be transferred, limits to how much taxpayers throughout the EU are prepared to pay for their European government. The EU should note that the bond markets strongly believe Greece will be the first but maybe not the only EU state which will renege on its debt because it has borrowed and spent too much. Why doesn’t the EU help it by cutting its own spending, instead of giving it more expensive lectures on austerity and putting up the bill for those same lectures?
There are three big areas where public spending can be cut without touching the core public services which are popular with many voters. These are unemployment costs by getting unemployment down, money given away overseas, and the costs of regulation. Cutters can also look at services and activities not valued by so many or as strongly as the core services.
All political parties agree on the need to get unemployment down, though there are arguments about how you do it. Much is riding on the government’s welfare reform programmes, designed to equip people to work and to give them the incentive to find a job. The UK cannot afford more than 5 million people of working age on benefits.
The issue of giving money away overseas is far more contentious. Now our gross contribution to the EU is around £20 billion a year it is a major item. The money we get back often comes back in the form of payment for spending that is marginal, little valued, or could be better controlled and spent under a UK programme. Overseas aid at £8 billion a year does not all go to the relief of famine and disaster, or entirely to very poor countries. The work being done to improve the effectiveness and to target the direction of the spending could allow reductions in the level of total spending for at least a year or two whilst we get the national accounts into better balance and work out more effective ways of using overseas aid. Many of us see no reason why the Uk should be contributing to Euro area bail outs. Nor should the UK pick up a large bill to help the UN in Libya, when others are better placed to do that.
The costs of policing and complying with all the regulations heaped on us over the last decade or more by a hyper active national and EU government should also be the centre of the deficit reduction programme. The UK needs a great Statute of Repeal, to confine to the dustbin of history many of the needless or infuriating measures passed in recent years. They were often the sledgehammer to miss the nut. There may have been a very worthwhile and moral purpose, but the regulation usually failed to tackle the heart of the abuse whilst burdening the many largely law abiding with big costs and complexities.
I suspect the government itself will conclude that items one and three are central to its task of deficit reduction, but will prove shy of tackling the easy money going abroad. High on the list of areas outside the core services that bloggers would like to see reduced are all the different expenses on climate change. That too may prove too difficult for this government.
The decision to supply protective clothing and now to offer military advisers to the rebels in Libya is an important development in the UK’s mission. This is more than operating a No fly zone, more than using high flying military intervention to prevent the Libyan government using warplanes and tanks in open ground against Libyan people. This is offering military advice to just one side in a bitter dispute, which looks like a civil war to some outsiders.
It would be wise to take the whole problem back to the UN and seek a review of the policy and the UN resolution. Is the UN satisfied with what has now been achieved in its name? What does the UN think should happen next? If more is to be done in the name of the UN, which other countries, preferably nearer to Libya than ourselves, might like to do it? The UN using NATO could stop tanks in open ground heading for the rebel city, but it cannot stop government troops from the air when they a embedded in cities and towns.
The US has been able to borrow larger sums for longer than European countries. More people and countries around the world will accept dollars and lend money to the USA.
Even the USA will discover there are limits to how much other people’s money you can spend before they refuse to lend you so much on such favourable terms. The politicians in Washington had realised that before Standard and Poors yesterday put the USA on notice of a possible downgrade of its credit status. A mild rebuke from the Agency attracted a lot of media attention. It has given the US politicians another push in the direction of deficit cutting. The Agency did not take sides between the Democrats who want more to come from taxes, and the Tea Party members who want more to come from spending cuts. In a run up to a Presidential election there will be plenty of politics in arguing over how, how much and when deficit reducing measures should be put in.
Meanwhile expect the lawmakers to agree that their current limit of $14 trillion of borrowing is simply not generous enough. This will be relaxed.
The True Finns suprised the complacent EU establishment with their strong showing in the election. They immediately had to offer interviews to assure everyone they are “not extremists”, anticipating a welter of vituperative commentary from those who dislike Euro scepticism.
I do not support their whole programme – nor am I a Finn. I do support their clearly stated view that there should no bail outs in the Eurozone. Those forming a government in Finland should listen carefully to them, and the rest of the EU would also be wise to think again.
Doubtless much effort will go into ensuring Finland does not end up placing a veto on any Portuguese bail out. It would never do for an electorate in Europe to express a view and for that view to then derail the carefully crafted train journey to European Union. After all, the True Finns are a minority within a small country. How dare they assert that the EU has got this debt and deficit issue wrong.
The trouble with that approach is that many people throughout western Europe disagree with the current EU debt and deficit strategy. Many share the True Finn view that lending more money to countries that cannot afford their current levels of debt is not a winning idea. Others take the view that Germany and the richer states have to be more generous. For them EU solidarity requires the rich to subsidise the poorer on a larger scale, as happens in unitary states between regions of differing income levels.
The markets are betting on Greece failing to make all the payments on its debt. The EU strategy of locking problem countries into large EU/IMF loans sentences them to years of poor performance in ways which will make local electorates restless. The EU policy is unlikely to produce faster growth or an early end to the rolling debt crisis. We should expect more “rogue” political results as pressures build up against the present policy on both sides of the argument.
It is conventional wisdom in all political parties to say that the cuts should be concentrated on the administrative overhead. Front line staff should be spared the cuts. I have said this myself. No-one wants to be hounded as a nurse sacker or a doctor reducer or a teacher cutter. Save our schools and hospitals is part of every UK politician’s mantra.
We need ,however, to think a little more carefully before assuming that all overhead and back up is bad. After all, there has been a long fashion to increase the amount of clerical and support work done for the police by civilian employees, so the police themselves can spend more time out of the office on duty, tackling criminals. Having the right number of specialist administrators, case workers and the like can make for more efficient policing.
In the NHS we need good medically trained nurses and cotors. We also need efficient receptionists, computer specialists to ensure the record systems work, procurement experts so the right medical supplies are available, and good administrators to keep a check on everything from patient records through to supplies of medicine. If we ask nurses and doctors to do too much of this work themselves we may have a less efficient and more expensive service.
The truth about cutting public spending is this. When it comes to core services like schools and hospitals which the public generally respects and wants, the only worthwhile thing to do is to make it more efficient. Both services will require more money over the years ahead, just as they have enjoyed throughout my lifetime. The sums will only be acceptable to taxpayers if we make the services more efficient whilst keeping or raising quality at the same time. Efficiency and quality go together if you introduce modern management approaches. Getting things right first time both raises quality and cuts costs, for example.
Anyone trying to achieve this should not be prejudge whether they need an extra front line employee or an extra or better adminsitrative support employee. Careful analysis of each situation should tell the managers whether they need more back up staff to free specialist time for specialist functions, or less back up because systems have become too bureaucratic and complex. Tomorrow I will look at other services where cuts are possible.
During the last election I was careful to explain the poor state of the nation’s finances, and to say when challenged to back some new local spending project that it would be very unlikely to take place whoever won, because the financial position was so dire.
I have to confess I was wrong about how much spending a future government would undertake. On my journey to my London office today I passed several substantial road works, with contractors paving over parts of the highway, resurfacing and painting blue cycle ways on the Embankment. Large numbers of new granite kerbs are being introduced, extra pieces of pavement fitted and new centre reservations and crossings introduced. We read about the increases in the aid and EU expenditures as well.
In the most infuriating category I read about the considerable number of new jobs still being created by certain local Councils. My office doormat still receives glossy brochures and consultation documents from various parts of the public sector. It is perplexing to read about possible job losses of front line public sector employees like nurses and police, when we see around us evidence of nice to have or undesirable expenditures at a time of restraint.
I would welcome more examples of needless or less essential spending from bloggers to get a better picture from around the country of what are the public sector’s priorities with the money it does have.
In 1997 the UK had the best private sector pensions schemes of any European country. We led the world in saving and providing for retirement out of funds that employers and employees put to one side for old age.
Labour’s tax attack started the rot. Funds that were solvent, with plenty of assets to pay future pensions, suddenly had to find £5 billion a year for the Inland Revenue. Shortly after we had the Dot Com crash. We were into the decade of disaster. The Credit Crunch crash snuffed out hopes of a revival from investment gains a decade later.
The latest figures show that only 21% of the surviving pension funds are still open for new members to join. A fifth of funds are now closed to new contributions and new years of provision for exisiting members. Last year saw high levels of closure of funds to exisiting members. No-one now seems to think the final salary pension scheme can be rescued for future generations in the private sector. Attention has turned to creating equality of disappointment by worsening the terms of public sector schemes to protect the taxpayer from their future costs.
Why have pension funds become unaffordable? Can anything be done to restore them?
Today there is a unique combination of circumstances that conspire against new schemes, or even maintaining existing schemes. It is not just the tax, though the tax rises started the decline. Were government to announce the restoration of full tax privileges there would be no rush to re-establish full final salary schemes. These schemes also have to contend with inflation, which makes final salary payments in the future much dearer. They face rising costs from the good fact that on average people are living much longer. They also have had a poor experience over the last decade from investment. Shares have had a bad ten years in the UK, US and Euroland.
It is now fashionable to say pension funds should invest heavily in government bonds. These are said to be matching assets for a pension fund. Fixed income bonds do not of course go up in line with wage and pension increases, nor do they suddenly pay more as people live longer, so it is not strictly accurate to say they match the demands of a pension fund. Worse still, at current levels of income on these bonds pension funds get a poor return. The income on these bonds is very influenced by the low official interest rates, and by the heavy buying programme from the Bank of England designed to keep prices up and bond interest rates down. A company needs huge sums to buy enough income when rates are 3-4%.
It is no wonder that recently Unilever and Sheffield University have decided to give up or reduce the range of their final salary schemes, like many other employers. There is no quick fix. With a deficit the size of the current one no governemnt will rush to restore the tax breaks. Even if they did poor past investment returns and low bond yields make a pension fund risky for employers.
I do not agree with all the long breaks we have from Parliament. The changes to the situation in LIbya and the new data about the Uk economy would be useful items to discuss, to ask the government for its latest thoughts.
I do not agree, however, that Parliament needs to meet to have a new vote on the Libyan situation. The government presumably knows that it has to keep to the terms of the UN Resolution which in turn were the terms of the UK Parliamentary motion. They may wish to get rid of the dictator, but the UN has not charged them with that duty and they would not be entitled to endanger civilian lives to do so.
If the leading western powers now wish to change their mission from protecting civilians to siding with the rebels and ousting the Head of state, they need first to return to the UN. If they wish to arm the rebels so they can fight more effectively, they will need UN permission to lift part of the arms ban on Libya. If they wish to make regime change the purpose, they need to amend the resolution.
The reason many other NATO countries will not supply air to ground attack aircraft is they are worried about the legality and dangers of using such weapons. Successful destruction of Libyan government tanks in open ground en route to shell civilians is within the spirit of the Resolution. Armed intervention against one side within urban areas where civilians may get killed does not appear to be within the terms of the Resolution.
If France and the Uk want to make regime change rather than the defence of civlians from the more grotesque attacks the purpose, they do need UN sanction. Then the Uk Parliament should meet again to debate and vote on the change mission.
I hear debate about the dangers of stalemate on the ground between government and rebel forces. That is a Libyan matter which is not covered by the UN. NATO governments have permission to run a No fly zone. They have established one, and have prevented the Libyan regime bombing its own civilians. All the time that remains the aim Parliament can be a no talk zone. Any mission creep requires UN and Parliamentary approval.