For the next few days I am going to look at a range of departments to see how they are getting on with controlling public spending. Let us begin with the biggest of them all, the Department for Work and Pensions.

 

               In the original Coalition spending review they proposed increasing current  spending from £158 bn in 2010-11 to £171 bn in 2014-15.  2010-11 turned out to be £160 billion, and last year spending reached £166.7 billion. This was  £3.3 billion or 2% more than the 2010 plan for that year.

              So why has it proved so difficult to keep to plan?  The main reason for the increase was the substantial uprating of pensions. The state retirement pension accounts for 44% of the total spend. The Coalition made the policy more generous with the triple lock pledge for better upratings. Higher inflation did the rest, requiring a larger increase.

                The second highest area of spending is housing related benefits. Housing benefit, Council Tax benefit and rent rebates added up to £27 billion last year, or 16% of the total. This year should see the first impact of the new housing cap at £26,000 per home. This remains high, so it will not do much to cut the rate of climb of housing benefits. Upwards movements in rents, especially in London, and the failure of most Councils to cut Council Tax mean continuing upwards pressure on the costs of this benefit.

                The department has made a substantial reduction in its running costs. These have fallen from £9 billion in 2010-11 to £7.7 billion in 2011-12. Staff numbers are down from 126,272 in March 2010 to 104,182 in March 2012.   It has not yet achieved a break through in the inherited high levels of fraud and error. These are still estimated at 2% or around £3.3 billion. The Coalition government thinks policy change, bringing in the new universal credit, should cut this fraud and error rate substantially.

                 As more people get jobs benefits to unemployed people will fall, but these are a small proportion of the total budget. Disability Living allowance is expected to rise as a cost over the life of the Parliament. The falls in unemployment benefit  cannot offset the higher pensions and disability benefits, so this budget will continue to rise.

 

         The second quarter provisional figures for the UK economy’s output show a becalmed  services sector, little changed overall on the previous quarter, and over 1% up on a year earlier. The smaller construction sector has had a second sharp quarter’s fall, along with a lesser decline in manufacturing and mining.

           Within the large services sector, once again rising real public spending makes a positive contribution to measured output. Financial and business services are also up, though now showing slow growth.  Transport and communications are down.

          The preliminary figures are based on estimates for June which assume poor performance resulting from the incidence of two bank holidays with the additional time off for Jubilee.  The sharp fall in construction so far this year  reflects survey evidence, and is probably accounted for by three main changes. The first is the ending of the major Olympics contracts. The second is the impact of the outgoing Labour government’s cuts in public capital spending, which were largely endorsed by the incoming  Coalition government. The third is the atrocious weather in the second quarter, which will have delayed work on many sites.

          Overall the economy is down 0.9% on a year ago. It leaves us still 4.5% down on the peak prior to the 2008-9 crash. Public current spending remains high. Private demand is less buoyant, where the tight tax and price rise squeeze has left consumers short of cash to spend. Falling inflation should help and is much needed.  The construction sector needs more orders. This is why the government is pursuing a number of schemes to try to get private finance into sensible projects.

 

          We have all been told not to drive to London. Anyone with tickets to Olympic events is told to take the train. You would have thought the railway industry would welcome this huge opportunity to show what it can do. What a chance to woo us to the trains.

          Instead the mainline from East Anglia decided not to stop some trains at Stratford as it was too hot yesterday.Various  tube lines have experienced  signal problems in recent days, delaying services. People who attended the rehearsal for the Opening Ceremony report long delays in getting onto the tube and other difficulties in getting home. To cap it all some in the RMT Union think this a good time to work to rule!

 

            Tax is a necessary evil. Tax is never popular. Most of us accept that we should pay some tax. We are willing to see money given to people who cannot fend for themselves. We accept some social insurance to help people going through a bad patch, or who have lost their job. We need some common defence. In the UK there is strong public support for state financed healthcare and education. All these things need paying for from taxes.

           The state’s aim should be to spend wisely and effectively to keep the overall tax bills under control, and to raise the money in ways which do as little damage as possible to incentives and economic activity. People on  high, middle  and low incomes need to feel it is worthwhile working more or smarter and earning more. Business people  need to feel it is worthwhile selling more and making more profit.

             It is difficult making the case that paying more tax is moral, and paying less tax is immoral. If an individual takes maximum benefit of ISAs, pension tax relief and the like  to save,  he or she is saving the state  lots of money in the future: they will not qualify for or need substantial state means tested benefits later in life. Why is this a less moral position than the person who saves nothing, pays more tax when at work, and then relies on state handouts in older age?  Why is a company immoral if it uses all the legal ways to avoid tax, enabling it to create many more jobs in the UK than it would do if it had to pay the full tax rates?  Couldn’t the UK state be better off as a result? Isn’t that why the UK state offers all sorts of tax incentives and exemptions to stimulate more business activity?

              Someone is not  immoral if they pay cash to a tradesman. The BBC got in a muddle talking about it yesterday, wrongly calling it avoidance.  If the tradesman receives cash for a service provided and then fails to declare the income for VAT or income tax purposes, then he is committing an offence. That is tax evasion. If the purchaser of the service knows the tradesman has offered him a lower price because the tradesman intends to evade tax, then the customer is aiding the tax evasion.  The Tax authorities can and do find people under declaring their income, and levy the tax owing with penalties.

            As  paying in cash is a legal way of settling your bill  it is difficult  to say that the customer has a duty to ensure the tradesman nonetheless declares all the income and pays tax on it. The main onus to comply with the law must rest with the tradesman, as it is he who will owe the VAT and income or profit tax, not the customer. It is best to keep morality out of the equation.  The government itself encourages small businesses by allowing them to avoid VAT, complicating the position of the customer trying to judge whether and how much tax the tradesman should pay.

          The government actively encourages tax avoidance by allowing and encouraging many ways of doing it. If you have high rates and are over the tax saturation point, as I think the UK now is, tax avoidance becomes necessary to many hard working individuals and companies who want to use the available reliefs.Tax evasion is against tax law and will be dealt with. The government itself relies on tax avoidance to help finance its own excess spending, by offering tax free National Savings.

 

              Mr Vaz and the Home Affairs Committee have issued a timely reminder of the bulging in tray of the Border Agency. They have added up the Agency’s own figures and reckon over 250,000 illegal immigrants are still in the country.

             The BBC has revealed the squalid conditions some illegal migrants live in, in sheds and lean to structures  illegally erected and inhabited in back gardens. They seek irregular cash based work. They feel let down by the border  buster gangs who charged them for their transit and entry to the UK.

           Now we hear that the socialist French President is going to allow Sangatte to start up all over again, allowing more illegals to find their way from France to the UK.

           The government has stated clearly its intention to clamp down on illegal immigration. It has said the Commitee has highlighted serious problems which it  is already tackling. Many would like to see faster progress.

            The first thing is to stop the new flow of illegals. Why doesn’t the Border Agency make it clear that no-one will be admitted without proper papers? It needs to end the practice of illegal migrants from safe countries turning up without papers and claiming asylum.  All new entrants, including asylum seekers, can and should have a passport or other document making clear where they were born and where they are a citizen. Anyone travelling without papers should be prevented from getting on the plane at the place of departure. Anyone destroying documents on the plane  should be sent back by the next flight to where they came from.  If there are putative problems with the ECJ or the ECHR the UK Parliament shoud legislate to make clear in UK law the rule of needing papers applies regardless. UK citizens flying to the USA have to show a visa or ESTA  visa waiver before being allowed on the plane.

           All people with papers seeking entry to the UK should be advised to seek pre-clearance in the country where they currently live. Asylum seekers from a list of badly governed  countries would  be exempted from such a requirement if it was dangerous for them to comply. Most entrants should arrive in the UK knowing they could enter, and the task of the Border Agency would be simplified and speeded up. Requirements for visitors and business travellers who are clearly coming for a short stay should be much easier than requirements for people wanting to settle and work here. It is quite easy to enter the US as a tourist or business person, but they do require your US contact address and  want to know when and how you are going home.

          The Agency should also start to tackle its backlog more rapidly. It should know how to contact all the people it has allowed short term entry and should ask them to leave in accordance with their agreed permission. Criminals should also be well known to the authorities and should be removed as soon  as possible.

 

              Today the markets will worry again about Spanish bond yields. It now costs the Spanish government 7.2% to borrow money for ten years, above the magic 7% level which many say represents the upper limit of affordability for a distressed Euro area sovereign to pay.

              Spain reached this sorry state late last week. Just as the details of the Spanish bank bail out money were once again being worked over, Valencia announced it needed loans from the Spanish federal government to keep it going.

             The EU spin so far has said that Spain the country is not bankrupt or overstretched. It is only the weak banks, say the authorities, that have led to financing problems. The much vaunted brilliance of the last Euro fix was to segregate financing the banks from financing the state. If the Euro rescue funds could go direct into the banks, without having to go via the state, markets would be relaxed about state borrowing. The markets rallied on this ragged proposition. The Germans were meanwhile trying to ensure there was some Spanish Central Bank/ state guarantee on the money the banks will borrow from the bail out funds, undermining part of the reassuarance.

             Last week the whole  argument over keeping the Spanish state safe from banking excess was overwhelmed by the news that Valencia needs help. Catalonia, Murcia  and others may also in due course want similar assistance. The Spanish provinces have devolved responsibility for big spending areas like health and education as well as more traditional devolved matters in a European federal EU member. As a result the federal government’s austerity packages, demanded by the Euro bosses, of necessity demand substantial cuts in regional spending as well as in federal government spending.  There is little love lost between the main regions and the centre. There is even less when the national government demands cuts. Some of the cuts are proving too painful or difficult. As a result the regions are now asking for some relaxation of the discipline, and at the same time saying they need help from central government to borrow the money they need.

           The Spanish government has also had to announce worse forecasts for the length and depth of its recession. This means less tax revenue and more state spending. The country is in a vicious circle, with more cuts and higher taxes leading to lower output and more cuts, all driven by the Euro scheme. Spain cannot try money printing or credit easing, cannot decide to borrow more because the cycle is against it. It has to increase the cuts.

           That is why Spanish yields are now dangerously high. The EU seniors will need to meet again before their summer holidays if they are to find another way to fend this off with spin and loans. There simply is not enough money to keep Spain going on current plans.

 

          The Prime Minister is right to say that Ministers going to the Olympics in an official capacity should go by public transport.  As these games are spending so much money and energy lecturing all the rest of us not to use our cars in any circumstances, it would be hypocrisy if Ministers decided they could swan along in the unpopular Zil/BMW  lanes with the Olympic officials who insisted on them as part of the deal.

          As BMW are official sponsors and supplying the cars it would also look bad if UK Ministers had to exclusively use BMWs, who only make engines here, and not be able to showcase the many good complete vehicles that are manufactured in the UK.

          If I had a ticket to go to the Olympic Park I would probably choose to go by tube as the most likely quickest way of getting there. That would, of course, depend on the tube working well that day, which is always a risk. It is the venues out of the centre that could have offered a car park option as well as a public transport option, to help those of us who do not live near a station, and cannot easily reach   a line that runs to the venue.

           Another advantage of Ministers going by tube is they could then find out what the service is like that the rest of us use on a regular basis. This week I needed to use the tube as I had a couple of journeys to make to meetings in Central London that were too far to walk in a sensible time. When trying to carry out the first one, on the Central Line, I was told that all lines save the Jubilee had a good service. When I got onto the westbound central line platform the service was badly disrupted by signal failure at Lancaster Gate. I took the eastbound and got back to Westminster via Bank, only to find from Monument that the District line westbound was also going slow owing to  signal failure at Gloucester Road.

           The next day I needed to get to St Katherine’s by the Tower. The District Line was scarcely functioning owing to another signal failure.  The Mayor and Ministers should make acquaintance with this day to day reality of what could be a good way of getting around in a crowded city where the politicians and officials  have spent the last ten years removing much of the road space from car drivers. Mass transit can work in a densely crowded city like London, but it needs to have good robust simple systems that either work or can be remedied quickly.

 

          June’s borrowing totals were not a pretty picture. The state borrowed £ 0.5bn more in June 2012 than in June 2011, after adjusting for specials.  The April – June quarter saw borrowing £6.8 billion up on the same quarter a year earlier, again adjusted for the Royal Mail Pension Fund and the closure of the special liquidity scheme for banks.

          However, there is some good news in the figures. At last the rate of increase in public spending is slowing. Current public spending was only 2.1% higher than a year before. Most of the increase came from benefit and state pension spending, where the substantial price related increase in rates last autumn is pushing total spending up sharply on this item. 

          The private sector  employment figures reinforce this good news, with 800,000 new private sector jobs since the government came to office.  This  outpaces the job losses in the public sector which now exceed 400,000,and mean a lower cost base for the public sector going forwards.

            As expected here on this blog, the main reason for the shortfall in the borrowing figures is poor revenue. Income tax receipts continue to fall in cash and real terms.  This should be no surprise, as the rate for higher earnings is uncompetitive and clearly many have no intention of paying it. 2nd  Quarter  2012 income tax receipts are down on 2nd quarter  2011, which in turn were down on 2nd  Quarter  2010. The economy has grown a little since then and employment has risen, so it is behavioural  not cyclical.  The last quarter brought in £32.7 billion from total income tax, compared to £34.366 billion in the same quarter in 2010.  The losses doubtless are all at the higher end, as PAYE payers on normal salaries will be paying as much or a bit more thna two years ago.

Public Sector employment:     March 2010  6.323m

                                                              March 2012  5.899m

Private sector employment     March 2010    22.539m

                                                             March 2012     23.382m

              Some of you have pointed to the possible discrepancy between the output figures, showing two quarters of declining activity, and the employment figures, showing jobs growth. The only way both can be right is if productivity is falling. It does seem odd that it should be falling so much. It seems even stranger that despite the rate of increase of the total population from migration, actual output is down. I suspect the output figures will be revised up a bit in due course. I think I trust the employment figures a bit more.

 

          When I last gave a lecture on leadership I chose to highlight Elizabeth I, Nelson, and Terry Leahy of Tesco.  My audience was ready for praise of Elizabeth’s skill   in standing up to Spain, the international bully of the day. They grasped the brilliance of Nelson’s band of brothers in delivering the greatest sea victory of the modern era at Trafalgar. They were more surprised by my choice of a grocer.

            Terry Leahy led a quiet revolution as Marketing Director, then CEO at Tesco. In the mid 1990s, when he first gained some power, Tesco was lagging behind the giants of the British High Street, Sainsburys and M and S. By 2011 when he left Tesco, the Group  had grown to six times the size of both its leading rivals.  It became the world’s third largest retailer, with access to more than half the world’s population through outlets in 14 main countries. It did this mainly by organic growth, building and fitting out stores and buying the right ranges of product.

              I was sent a book a little while ago written  by Terry Leahy to review. I have been too busy with Parliament in session to read it. Today I picked it up, and could not put it down until I had finished it. It says so much so well about how  to lead large organisations. If its simple messages were adopted by public sector leaders, we could have so much better public services at less cost.

                  Terry Leahy’s ten words for success are  truth, loyalty, courage, values, act, balance,simple, lean, compete and trust. If he had to choose just one, it would be “truth”. How right that is, and how well he grasped it to transform Tesco.

                  When he took on the task of making Tesco number one in a highly competitive market when it was well behind Sainsbury, he began with a brutally honest appraisal of Tesco’s stores, service, product and prices by asking customers what they thought. He believed them when they said they did not like the layout of the shops, did not think the prices were good enough, and  did not think Tesco was sufficiently on their side. He set about changing all of that.

                   He discovered that if he asked representative loyal local Tesco shoppers  how the store budget should be spent to improve the shop, they not only gave him good ideas, but ended up spending less because they had the canny householder’s sense of having to live on a realistic budget for improvements. His customers told him they needed special foods for allergies if he wanted to keep that family’s entire shop. They wanted to feel valued.

                     The big break through came when he introduced the Tesco Clubcard. He took the risk with his boss who some years earlier had dropped green shield stamps, and faced a withering comment from his main competitor about it. It worked. People liked getting 1% back from their purchases as vouchers to cut the cost of their next shop. It was a way of saying Thank you. Even more importantly, it was a way of transforming the company’s knowledge of its customers and what they wanted. It took retail merchandising and marketing onto a new level. It meant the business could be customer friendly.

                    The public sector remains so far detached from its forced customers, the taxpayers.  It  does not use these great modern techniques to serve the customer better. Mr Leahy when he ran Tesco pleased millions of customers and showed how to do it. Leadership starts and ends with truthfulness about what you are doing and what the customer wants. Customer wishes  drive good businesses, and are ignored by bad.

                         If only something like our national roads service was run with the drivers’ interests in mind. Just think how much better, and better value it would be.

 

Terry Leahy: Management in ten words (Random House)

 

              Let me make common cause today with the labour movement. Wages in the UK are too low. Instead of spending so much time complaining about the pay of a minority who are well paid in the private sector, maybe we should spend more time asking how more people can enjoy higher pay. I am not one of those hypocritical commentators on a good salary always urging pay restraint on others.

               Before the labour movement gets too excited, however, I do believe a couple of other things about pay. I do not think you can legislate successfully for higher pay. It has to be earned. The problem with minimum wage legisaltion is if you set it too high you drive jobs away, and if you set it too low it has no benefiical impact. If you get it somewhere in the middle it does not deliver great living standards, and may still encourage  non compliance and a larger black economy. Labour’s minimum wage has left many people on low pay and in receipt of benefit top ups so they have a more reasonable income.   The UK’s problem is we do not have enough companies with enough power in the marketplace to command the prices and sell the volumes we need to pay more people higher pay. This is what economists call our productivity problem.

               Sensible people in the Union movement accept that we need a culture of “something for something” or “more for more”. It may not mean working harder or longer hours, though that does usually  bring forth higher pay. It may mean working smarter. Our best manufacturing businesses in the UK know and do this already. They put the machine power at the elbow of their employees. They train their staff. The treat them with respect and pay them well as the factory achieves its targets.

                 The Chinese economy is advancing rapidly with large increases in real wages fuelling more domestic consumption, which in turn pays higher domestic wages. It is a virtuous circle. In their case it it is still taking place from a base position of much lower  average wages than we enjoy. There is no reason, however, why an advanced country cannot also create a virtuous circle. It is about training and motivation, about reward that people want and believe they can achieve.