Friday, August 8, 2008

UK Comprehensive Spending Review - Post 1

I have just been having a look at the UK government Comprehensive spending review which can be found here (for the brave only). Whilst reading through the report, I found endless points where I thought 'I should write about that'. I therefore decided to post as I perused. My original intention was to analyse where government money is being spent, but there were so many points in the general text that demanded attention that I have been distracted from my original purpose. As such, the review of spending in the specific will have to wait for another time.

I will try to ruthlessly edit myself, as there is far too much content worthy of comment. As such I will just note particular points that grab my interest, and comment very briefly. I would like to take the time to dissect this review but, as ever, time is not on my side.

A starting point- this is 'box 2.2' on inflation and pay (p26):
The UK economy is experiencing both an unprecedented period of growth and its longest period of sustained low and stable inflation since the 1960s. Low inflation has provided the platform for record employment levels, higher investment, productivity and economic growth. [.....]

In contrast to periods of higher inflation in previous decades, the credibility of the UK’s monetary policy framework has kept inflation expectations anchored and earnings growth has remained subdued.
The first problem with this wonderful section is that the government is taking credit for the low inflation. It seems that, when inflation is low, then it is down to the government, but when inflation is high, it is down to external forces. The reality, as I have made clear in past posts is that inflation and wage restraint has been the direct result of a massive number of new workers entering the world economy. That the government claims credit during the good times, and refuses blame during the bad is just dishonest.

I am tempted to comment on the 'Golden Rule' and other such nonsense in the report, but am not sure I can add anything to the discussions that have been provided elsewhere. As such I will not waste time on the farce, except to say that the Golden Rule is a sleight of hand, and makes no sense on any level whatsoever.

There is one point that emerges in discussion of the 'Golden Rule that demands attention. This is the endless use of the word 'investment', where the government actually means spending. I have argued elsewhere that the idea of government borrowing to 'invest' is unsupportable, but in many places in this report, the word investment is actually a direct synonym for spending, and can not even make (albeit flimsy) claims to be investment. Why has the media allowed this word to be used in this way? It is one of the great mysteries.....

Just to illustrate the point:
investing in Britain’s future, with total public spending over the CSR07 period
rising from £589 billion in 2007-08 to £678 billion in 2010-11 – an average increase
of 2.1 per cent a year in real terms consistent with the fiscal rules – enabling
further investment in the Government’s priorities of education, health, transport,
the Olympics, security and housing. Within these plans the continued strength of
the UK’s public finances have enabled an addition of £2 billion to the plans set at
Budget 2007 to take forward vital capital investment in public services;
Apparently, investing includes paying for a person to deal with your tax return, or to pay for a frigate, or to pay a nurse, or a social worker, or to... I could go on. The point is that all of this is apparently 'investment'. And the return on buying a frigate is how much? What is the return on the Olympics?

The curious part is that, at other points in the review there is an acknowledgement that this is spending. But how many people read that far? e.g.
spending on the National Health Service is nearly 90 per cent higher in real
Moving to a different point entirely, apparently the UK is in a good position for the long term.
2.46 The most recent assessment, published in the 2006 Long-term public finance report, shows that the UK fiscal position is sustainable over the long term. The UK is in a strong position relative to other developed countries to face the challenges of an ageing society. A further discussion of long-term fiscal sustainability is included in Annex B.(p30)
This statement would be amusing if it were not serious. The UK long term fiscal situation is dire. The UK has an unfunded pension system, an ageing population, and ever growing health care costs (that are likely to increase ever faster with an ageing population and ever more expensive treatments). No doubt the government will suggest that the UK is in a better position on pensions than, for example, some European countries, but that is like comparing a man with broken arms and legs with a man with a broken back. If we also consider that this long term is one of sustained economic growth, then the scale of the erroneous thinking becomes clear. This is a big subject, and I will return to it in the future, including some proposals for reform.

I will now quote a paragraph, and will not even comment on it. I will let you be the judge of the merits of what has been said:
third, value for money for the taxpayer – ensuring that world-class public
services are not just pursued through increased spending alone, but by
targeting resources on the most effective policies, reforming delivery to raise
productivity and increase efficiency wherever possible – thereby ensuring
sustainable levels of public spending which entrench macroeconomic
stability and maintain the UK’s competitive position in the global economy. (p31)
It is a bit later that we come to a rather frightening section as follows:
3.3 These increases in spending have been made possible by the stable and sustainable economic growth described in the last chapter, with falling debt interest payments and low unemployment releasing resources for key priorities, as illustrated by Chart 3.1. (p36)
I say scary because they then show a chart that gives growth in expenditure from 97-98 predicted out to 2010-11. Included in this projection is that the servicing of government debt will fall by approximately 1.5%. This is positively Orwellian. The truth is that debt is increasing, and this chart is based upon a continuous high growth rate in the economy. Instead, the economy is sinking fast. Furthermore, as the economy sinks, along with the £GB, borrowing is going to get much more expensive, if anyone is going to lend at all (excepting the IMF).

The other obvious point is the talk of stable and sustainable growth. Bearing in mind the state of the economy at the moment, the idiocy of the statement is already evident.

The report later starts to talk about improvements in front line services (they switched back to 'investment' again here rather than spending). I give an example as follows:
deaths from cancer have fallen by 14 per cent, and from heart disease by 31
per cent. In total, over 200,000 lives have been saved since 1996 as a result of
reductions to mortality rates from cancer and circulatory diseases among
people aged under 75; (p37)
At this point, it might be mentioned that cancer was one of the targets that were measured by government. I quote below something that I wrote on another occasion on the Balanced Scorecard (BSC), which directly addresses the problems of targets (sorry for the change of font).

There are some inherent risks in any measurement system. Neely, in the performance Prism, [1] describes an incident in an airport business. A senior executive in the airport noticed a baggage handler running with a bag towards a carousel. When he enquired about why the man was running it became apparent that the baggage handlers were measured on the time that it took from an aircraft landing to the time that the first bag went on the carousel. As soon as the start button was pushed, the time was recorded. Clearly, the intention was not to have handlers running with and individual bag, but was intended to ensure speedy disembarkation of luggage.

The point in the example is that measurement systems cause distortion in the behaviour of those being measured. This is one of the greatest risks in the BSC system, despite Kaplan and Norton’s warnings against the dangers. Taking an example from the real world it is possible to discern examples of measurements distorting behaviour. One famous example was apparent in the last UK election. Doctors were set targets for appointment booking times, and the system created a distortion such that appointments were delayed in order to ensure that a booking target was met.

At this point, I will leave this post, as real life is demanding my attention. However, I will return to this subject in the future, time allowing. In the meantime, I strongly suggest that you take a look at the report (I am afraid 286 pages of it). However, if you look at nothing else, look at where government money comes from and goes to. It can be found at the start of the report. As you look at the charts, just ask yourself:

'Where is this money actually going?'

This is a subject I will certainly cover in the future. My apologies for an incomplete post, but I can either read the report or write a full post. In order to comment, I need to read the original, which does not leave much time for comment. As such, a compromise. I would wait, but it seems that I have a growing regular readership, so like to add fresh content whenever I can.

[1] The Performance Prism, Neely A. et al, 2002, Pearson Education, 1st Edition, UK

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