The TaxPayers' Alliance - Burning our Money

The Cost Of National Pay Scales

National pay scales in operation

One of the reasons we get such poor value from our public services is that government continues to operate national pay scales for its employees. National scales ensure we pay too much and too little, both at the same time. In London and the South East they mean that the public sector doesn't pay enough (despite some regional allowances) to attract and retain sufficient good quality staff. In the poorer regions they mean the public sector wastes money by overpaying.

We've blogged this before, drawing on work by Prof David Smith to highlight the gross inadequacy of current regional pay weightings for public employees:

"Smith shows how median earnings are getting on for 50% higher in London than they are in the North East (44.2% in 2005 to be precise). Even in the South East outside London they are nearly 20% higher.

Yet if we look at say the DfES teacher pay scales, even for Inner London we find the top of the main scale for classroom teachers is set at only 15% above the national scale (£33,936 compared to £29,427 nationally). And the premium for the London "fringe" is set at a meaningless 3%.

Such weightings don't reflect differences in the basic cost of living, let alone alternative employment options. As Smith highlights, ONS figures show that the general price level is 16% higher in London compared to the North East, and average house prices are an eye-watering 102% higher."

The Institute for Fiscal Studies has recently published its own analysis. They've computed average earnings in the public and private sectors for each region. The following chart shows the results for male graduates, the type of people needed in a lot of key public sector jobs, such as teacher.

As we can see, in London there is a big difference between earnings in the two sectors, with average public sector pay- including regional allowances- being c 25% below the private sector level. In stark contrast, public employees in Yorkshire and Humber, Northern Ireland, the North East, and Wales do very well. In Wales, they earn on average getting on for 20% more than their private sector counterparts.

For public services in London and the South East, there are a number of serious consequences.

First, staff recruitment is more difficult, which is reflected in higher vacancy rates. So schools and hospitals will be understaffed, or be forced to use expensive temps (we've blogged this before in the context of nurses see here and here).

Second, staff retention is more difficult, reflected in higher turnover rates. The IFS has produced the following chart showing wide regional variation in teacher turnover:

As we can see, turnover in London schools is nearly 20% pa, whereas in Wales it's only 12%. Yet staff continuity is vital for any school to be successful.

Third, there is evidence that public sector staff differ quite markedly between the regions. For one thing, staff in London are on average younger and less experienced than those elsewhere: the IFS has found that 46.5% of teachers in London are aged under 40 compared with just 38.5% outside London. They comment:

"The characteristics of those delivering key public services differ quite dramatically across the country. Other aspects of the ‘quality’ of public sector workers may also vary as a result and there is some evidence that this makes a difference to outcomes in health."

What this all boils down to is that taxpayers in London and the South East are almost certainly getting worse public services than those elsewhere in the country. Their schools and hospitals will be staffed by less experienced and lower quality personnel, there will be more unfilled posts, and continuity will be low.

Against that, the poorer regions may gain correspondingly better staff. However, while that may work in picture-book market towns and scenic rural areas, it's most unlikely to extend to the real problem areas in our old industrial heartlands. And also, the presence of relatively well paid public servants pushes up local housing and other costs for those who have to work in the local private sector.

For taxpaying customers national pay agreements are an awful deal. As we've blogged before, we need a government that has the spinal equipment to take on the public sector unions and dismantle these seventies throw-back one-size-fits-nobody arrangements. It is a key condition for the fiscal decentralisation we so desperately need.

COUNCIL SPENDING UNCOVERED NO.3: PENSIONS

INDIVIDUAL DATA PROVIDED FOR EVERY COUNCIL IN THE UK

Download Council Spending Uncovered No. 3: Pensions (PDF)

• £1 in every £5 of council tax spent on local government pensions
• 2006-07 saw a 13% rise on 2005-06
• Average council spends £10 million a year on pensions
• Total bill for Local Government pensions is £4.6 billion

The first two papers in the Council Spending Uncovered series - which investigates wasteful and frivolous town hall spending - revealed a £450 million local government publicity machine and that £1 in every £11 of council tax is spent on middle managers' pay. This third paper examines local government spending on pension contributions, which again is recorded in the annual accounts of councils across the country. Those accounts reveal the shocking burden of gold-plated local government pensions, and detail both that spending and how it is growing for every council in the country.

Public sector pensions are of course a controversial topic, but one that must be urgently confronted in order to avoid a future crisis. Against a general climate of demographic change and pension funding concerns, public sector pensions are particularly an area of risk to taxpayers due to their extremely generous nature and often unfunded liabilities. Local Government pensions are no exception. Given that pensions are supposed to provide security for our future it is a worrying irony that, unless urgently reformed, public sector pensions pose a serious risk to our financial wellbeing.

To improve the situation, the TaxPayers' Alliance calls: 1) for each council to cease the payment of added years benefits to staff who retire early; 2) for councils to collectively campaign for national reform of the pension scheme; 3) for Hazel Blears, Communities and Local Government Secretary, to reform the Local Government Pension Scheme.

Key findings

• In 2006/07, the average local authority spent £10 million on pension contributions every year, which is a 13% rise on 2005/06.
• The total bill for Local Government pensions is £4.6 billion a year.
• £1 in every £5 of council tax is spent on pensions.

Andrew Allum, Chairman of the TaxPayers’ Alliance, said:

“It’s unacceptable that ordinary families and pensioners who struggle to pay inflated council tax bills see so much of their money spent on gold-plated council pensions that have all but disappeared in the wider economy.  With pension costs jumping 13 per cent in one year, the problem is clearly getting worse and requires urgent attention.  Councils should start correcting their own behaviour immediately, and the Government must face down union pressure and reform the outdated local government pensions scheme as soon as possible.”

It should be noted that:

- There has in the past been significant controversy over how much council tax is spent on pensions. Council tax is not the sole source of income for councils, nor is it earmarked for pensions, but all spending comes from the same pot - any savings made could be used to reduce council tax.

- The overall terms of the Local Government Pension Scheme are set by national Government, which is why we urge Hazel Blears to carry out radical reform of the scheme. That does not absolve councils from blame, however, as each has the opportunity to reign in their payments and to lobby the government for reform.

- Frustratingly for those who believe in accountability and transparency, local authority accounts can differ between councils and over time. That said, this is the most comprehensive and up to date study of the issue.

Commissars Gave Away The Farm

Just be thankful they're not in charge of pie buying

This morning we've got the NAO drains up on that GPs pay deal. We've blogged it many times of course (see collection gathered here), and we'll be doing a proper post on this report later. Meanwhile, here's the NAO's own overview:

"The contract has cost the Department £1.76 billion more than it originally budgeted for. In the first two years of the contract, productivity has fallen by an average of 2.5 per cent per year. GPs are working on average seven hours less per week than in 1992, partly because of the removal of the responsibility for out of hours care. While the number of consultations with patients has increased, these are not in proportion with the increase in costs.

The largest overspend of the contract was due to an underestimation of the amount that GPs would earn from the pay for performance scheme, the Quality Outcomes Framework (QOF). While there is evidence that the QOF has improved consistency in the quality of care, it is too early to say if overall patients’ health has improved as a result.

In 2005-06 the annual average pay of a GP partner was £113,614, an increase of 58 per cent since 2002-03. GPs report, however, that over the last year their pay has stayed the same or decreased. GP partners have taken more profit from the practice as pay while the average salary for GPs they employ increased by only three per cent in the first two years."

From a taxpayers' perspective, this is an unmitigated disaster. And it once again underlines just why Whitehall cannot be trusted to get value for all the money they take from us.

But to reiterate what we've said before, the culprits are the commissars. If you were a GP partner, and some idiot offered you a pay deal beyond your wildest dreams, you'd take it too.

Oh yes you would.

Non-job of the week

Devon County Council thinks it right to spend £27k of your money on reducing its own carbon footprint.  Perhaps they could have thought of a car share scheme or even ask their employees to take the bus instead of shelling out well over £30k on a bureaucrat, office space and other expenses to devise schemes, on the taxpayers buck, to cut carbon emissions.  As you'll see above, I just devised a whole carbon reduction strategy for them and it didn’t cost them a penny.  Yet that won’t stop them trying to burn more taxpayers’ money on programmes and non-jobs that really shouldn’t exist. 

With this non-job, Devon County Council are burning your money to stop themselves burning more in carbon emissions.  Perhaps if it scrapped these conscience-driven non-jobs and offered Council Tax cuts for ‘green’ behaviour, it could make environmentalism more attractive and actually reduce overall carbon emissions.  Sadly the culture of big government mandates that government is always the answer to whatever problem, even the ones it creates.

So yet again from the Guardian Society pages we give you our non-job of the week:

“Climate Change Programme Support Officer

£23,749-£27,594

Do you know what your personal carbon footprint is? Do you know what actions you need to take to reduce it in line with national targets? Are you taking those actions and are you on track to reduce your CO2 emissions? We do and we are. As part of our 'making Devon greener' programme Devon County Council is looking for an enthusiastic person to assist our Climate Change Programme Manager in delivering significant carbon reductions from our corporate operation. Ideally, you will have a deep understanding of the climate change mitigation agenda, and possess both project management and communications skills and experience.

Based in the vibrant city of Exeter (now headquarters for the Met Office and the prestigious Hadley Centre), you will work as a member of a multi-disciplinary strategy team in the Directorate of Environment, Economy and Culture. Your task will be to progress a growing portfolio of carbon reduction projects being delivered across the organisation, and to identify and implement new opportunities. A quarterly update of our carbon footprint will provide the measure of your success. Your work will also include raising awareness of our corporate responsibility for managing carbon with staff through our Carbon@Work programme.

For an informal discussion only, please contact Ian Bateman on 01392 383390.

For an application pack, please contact the 'First Stop Desk' on 01392 383034 or 01392 383037 (answerphone), email firstop@devon.gov.uk or apply online at http://www.devonjobs.gov.uk

Closing date: 21/03/08.

Interview date: 10/04/08. Ref: ENV308 G.

Salary is subject to job evaluation.

We are committed to equal opportunities in employment and service delivery, and are only interested in your ability to do the job.

http://www.devonjobs.gov.uk

Devon County Council

POSITIVE ABOUT DISABLED PEOPLE”

P.S. The award for the most unfortunate job title goes to the Teenage Pregnancy Implementation Manager at Manchester City Council.

Wagging Off School

Going up

There are three points to make about yesterday's dire truancy statistics (see DCSF stats release here).

First, as the chart shows, overall truancy has continued to climb. The percentage of half days missed due to unauthorised absence in primary, secondary and special schools in England increased from 0.92% in 2005-06 to an all-time high of 1% in 2006-07. A decade ago it was 0.73%.

The picture in secondary schools is even worse, with a truancy rate last year hitting another all-time high of 1.5% compared to 1% a decade ago. That's a 50% increase under education-education-education Labour.

Second, this has all happened despite the government's much vaunted £1.5bn anti-truancy programme, already heavily criticised by the NAO and PAC (see this blog). The stated aim was to reduce truancy by one-third: the outcome has been an increase of one-third. The money has simply been wasted.

Third, truancy gets much worse as pupil age increases. By Year 11 (15-16 year olds), the truancy rate is over 2.5%:

The chart highlights that while most children will accept primary schooling, once they get into their teens at secondary school they can kick against the whole idea of compulsory schooling. And the older they get, the more likely they are to behave accordingly.

Which is why so many teachers are so concerned about the government's plan to raise the leaving age to 18. It's not just the cost, but the fact that teachers struggling to contain disengaged disruptive 17 year olds simply cannot focus on their real job (see this blog).

Public Employees Going Private

Booming independent schools

The TES has been talking to some of the thousands of state school teachers who send their own children to independent schools.

For obvious reasons, many of them won't talk, but this is John, a primary deputy head in Norfolk:

“People say to me: ‘How can you teach in a state school if it is not good enough for your own child?’, but what I choose to do for a job shouldn’t come into it. Nobody has to bring their child to the school I work in; they go to the school they think is best, whether they have to pay for it or not. I know some people find it difficult, but I’m not going to give my daughter a poorer quality of life if I can help it.

I think I’m a good teacher, but I wondered whether I was good enough for my daughter. She goes to French club and knitting club, there’s a computer club and sports clubs, swimming and karate. She wouldn’t get that in a state school. She has developed and become more confident and can sit and read Harry Potter books. I can’t prove that wouldn’t have happened in the state sector, but I doubt it.”

Andrea Caish, an ex-head at a state primary in Gloucestershire, says:

“We weren’t happy with the large classes in state schools... we felt [our daughters] were drowning. One year the school had a mixed class, and as Victoria and Alex are only 18 months apart they were both in the same class, which we didn’t like too much. You are reduced to the level of the lowest in the class and if a child doesn’t behave then everybody suffers.”

Sam, a state school teacher in Kent, says:

"It went against my politics and it was something I wouldn’t have dreamt of considering a year or two earlier, but you have to be realistic. They’re your kids and you want the best for them, so you compromise your principles.”

We don't know how many state school teachers do this, but a couple of years ago the TES polled 700 of them, and a quarter admitted they would if they could afford to.

A vote of confidence in state provision it isn't.

Things are no better in the NHS. Last month we learned that 31,000 NHS health professionals have joined a cut-price Bupacare private scheme, including 12,000 doctors (5% of the UK total) and 15,000 nurses (2%). Overall, as we blogged here, 22% of NHS doctors already have private medical insurance, and one in three would prefer to be treated privately.

Peter Fisher, president of the NHS Consultants' Association, says:

"This demonstrates a lack of confidence in the NHS services they are providing if they won't take it themselves."

It certainly does Mr Fisher.

So is it hypocrisy? As very well informed consumers, these teachers and doctors are making the rational choice for themselves and their families. And we can hardly hold that against them.

But as with those private school parents Ruth Kelly and Diane Abbott, there is an important caveat. Although they can quite reasonably go on working in the public sector, they owe it to the rest of us to get out there and argue for the same choice to be extended to those who are not so well placed.

Because while plutocrats, MPs, NHS GPs, and state school teachers can afford to pay for private services on top of their taxes, most people simply cannot. The vast majority cannot afford to pay twice, and our dysfunctional top-down public services are all that's on offer.

The only known path to improvement is choice and competition, just like in the private sector. Public employees who go private must accept their special responsibility to bring that about.

PS How many MPs have their children privately educated? We don't know for sure but it's obviously a lot more than Diane Abbott, Ruth Kelly and George Osborne. For them, there is no hiding place. They have a clear duty to work energetically for the extention of comparable choice to ordinary parents.

Bugged About Biodiversity

Pricey bird

The other day the excavators moved back into our local patch of Surrey woodland. Well, I say woodland, but actually these days it's more like a scene from the Battle of the Somme. Where once we had trees, we now have vast tracts of open muddy ground, fought over by squadrons of earth-movers and teams of men armed with chain saws.

When these people first appeared a couple of years back we assumed it was yet more houses, and girded up our nimby loins to protest. But it wasn't that at all.

It turned out that all across Southern England thousands of acres of woodland are being uprooted as part of a commissariat masterplan to recreate Egdon Heath. Something called Tomorrow's Heathland Heritage is costing us £25m plus, and will take at least a decade to complete. It's all in the name of biodiversity, the idea being that we need fewer trees and more Dartford Warblers (pic above), rare bees, rare heathers etc etc.

There are some familiar points to make. First, much of our heathland only disappeared originally because a previous generation of commissars planted socking great forests on it after WW1 (ie the Forestry Commission). With the benefit of hindsight it seems that was a mistake. But of course, this time round the commissars are sure to have got it right. Right?

Second, nobody asked me or other local residents what we thought. The website for our local restoration project promises more adders, spider-hunting wasps, and insectivorous sundew plants- the only thing missing is wolves. Is that what locals want? Plus, residents have had to put up with all the noise, mess and general harassment of the work, and are losing their tree privacy screens into the bargain.

Third, why should we pay taxes just so the commissars can have a go at playing God? Who says heathland is better than woodland? Our landscape has constantly changed, and as we understand it, most of Southern England was forested until the arrival of agriculture. Why should the commissars decide heathland is the landscape of choice for us?

But this is part of a much bigger picture.

Last Friday, the BBC Today programme ran yet another of its eco items. One of their scores of eco-reporters was hunkered down on the Dartford marshes with a man from Buglife. He had a four minute slot to push their campaign to save some endangered bug.

Fair play to Buglife. They are a campaigning group, and of course they'd take a free slot like that. But as always, we were left wondering about money: who are Buglife and how do they fund themselves?

Buglife is a registered charity, and their website lists an impressive array of private funders and corporate sponsors. But nestled right in among them we find the 2010 Biodiversity Action Fund, the Environment Agency, the Heritage Lottery Fund, Natural England, and the Scottish Environment Protection Agency. In other words, the taxpayer.

So how much are we taxpayers in for? As always, it's fiendishly difficult to find out. But according to Buglife's latest published accounts, in 2006 they had total funding of £284,218, of which £208,711 was "restricted"- ie "the charity successfully bid for a variety of grants". We're guessing most of that £208K was from us.

But let's not pick on Buglife: they're just one of many NGOs who are getting our money for biodiversity projects.

And the NGOs are just one part of an even bigger picture. According to Annual Biodiversity Indicators In Your Pocket 2007 (ONS), in 2005-06 the government spent no less than £360m on UK biodiversity projects, and a further £25m on global projects. That's well over twice as much as the NGOs raise for themselves.

We have no objection to Buglife. Or their campaigns. Or any of the thousands of similar campaigns that have sprung up around the place. But we do object to being taxed to pay for them.

And we do object to the massive quangocracy that has inevitably sprung up on this patch of reclaimed heathland: the new superquango Natural England spends around £250m pa, including £90m pa on staff (see their first Report and Accounts here).

We have no confidence in the commissars' ability to manage our biodiversity. None whatsoever. After all, they spend most of their time trying to stamp out diversity, and according to the following chart, biodiversity managed pretty well for hundreds of millions of years before anyone even thought of commissars:

And while we'd have much more trust in the bottom-up enthusiasm of voluntary groups, as we've blogged many times (eg here), voluntary groups principally funded by government grant are no more than biodiversified quangos.

So stop taxing us to play God.

And while you're at it, stop bulldozing our woodland without even asking us.

Record numbers retire on £1 million NHS pension pots

• 8,500 retired NHS staff have retirement benefits worth £1 million
• Total bill of £8.5 billion

The bill for public sector pensions is of growing concern for taxpayers facing huge bills for underfunded and over-generous pensions. In December 2007, the TaxPayers' Alliance (TPA) revealed that there are almost 3,700 retired civil servants with retirement benefits worth £1 million. In the second paper of our public sector pensions series, we look at the generosity of pension arrangements in the NHS in England and Wales.

Using information obtained from the NHS Business Services Authority Pensions Division, TPA researchers have calculated the extent of the taxpayers' pension commitments. The findings are shocking:

• There are almost 8,500 retired NHS employees (including GPs) in England and Wales with retirement benefits worth £1 million.
• The total value of these retirement benefits is almost £8.5 billion (up to £337 per household)

Download £1 Million NHS pensions (PDF)

Corin Taylor, Research Director at the TaxPayers’ Alliance, said:

"Unfunded public sector pension liabilities are reaching completely unsustainable levels. Every household will have to pay up to £40,000 over the next few decades to fund gold-plated retirement benefits for public sector employees, including £1 million pension pots for the NHS elite. Urgent change is needed to reduce the bill to taxpayers – for a start, the pension age for existing public sector employees should be raised to the state pension age as soon as possible.”

The figures, which were obtained through a Freedom of Information request, have been scrutinised and approved by Terry Arthur, Fellow of the Institute of Actuaries and Fellow of the Pensions Management Institute.

That 50% University Target

There is a cheaper way to those bits of paper*

One of this government's best known New Jerusalem targets is that 50% of our young people should be educated to degree level.

But why? How did our "evidence based" rulers reach that conclusion? Especially with higher education now costing taxpayers £12bn pa, and costing the students themselves many billions more in foregone earnings and fees.

The Public Accounts Committee has had a go at finding out. During their recent probe into university drop out rates, they asked the two mandarins in charge: Ruth Thompson, Director-General of Higher Education at the Department for Innovation, Universities and Skills, and Professor David Eastwood, Chief Executive of the Higher Education Funding Council for England.

It's worth quoting some of the exchanges because they underline the arbitrary way this highly expensive policy was decided. Here's Labour's excellent Alan Williams, the last surviving MP from Wilson's 1964 victory and now Father of the House, who's seen it all a million times before:

Q144 Mr Williams: What evidence is there to show that 50 is the correct proportion to have going to University?

Professor Eastwood: If you look at the latest OECD statistics, participation varies a lot. It can be as high as 85%. We are working with the Government. We are certainly demonstrating that there is unmet demand for higher education. As the sector has grown...

Q145 Mr Williams: I am sorry, but you are not answering my question. My question is what evidence is there that 50% is correct? It seems a coincidental figure. It is too smooth, is it not?

Professor Eastwood: The two countries that I would point to, which I visited recently, are Australia and Japan. They are not dissimilar countries and they are at 50% participation....

Mr Williams: But they are different economies from us. What is right for them is not necessarily right for us.You cannot say that because Australia has 50%, Britain should have it too. Why Australia? It just happens to fit, does it?

Professor Eastwood: No, there are some structural similarities in the way that their higher education system and ours work...

Q147 Mr Williams: I asked what evidence there is. Is it empirically based, or is it just aspirational?

Professor Eastwood: There is a target to continue to grow the sector.

Q148 Mr Williams: It is aspirational? It has no scientific base?

Chairman: Yes or no?

Professor Eastwood: It is an aspiration to continue to grow the sector, yes.

Q149 Mr Williams: Okay, so it has no statistical validity. It is just an aspiration. That is fine, as long as we understand that... it is a target figure that has largely been plucked out of the air.

We should remember that- the 50% target was plucked out of the air.

But at least they've established the economic benefits of getting a degree.

Haven't they?

Here's BOM's old friend Richard Bacon MP trying to pin down exactly what evidence the government is using. As you will see, there are a number of wildly different figures to choose from:

Q33 Mr Bacon: I want to ask you about the economic benefits of a degree.The [NAO] Report says that a still unpublished Pricewaterhouse Coopers study said that the economic benefit was £100,000. Is that correct? I remember the Government vociferously repeating a number of £400,000 at the time of the student funding debate [in 2002].

Professor Eastwood: There have been a number of attempts to calculate a lifetime’s earning benefit to a graduate.The figure given at the time of the Higher Education Bill was a gross figure rather than a net figure. The figure that I gave when I was last asked by a Select Committee about the lifetime’s earning premium was £160,000...

Ruth Thompson: May I add to that? The £400,000, as Professor Eastwood says, was a gross figure. It was also not discounted to present values. The subsequent work that we have done... has led us to refine and improve that figure... We have come up what we tend to say is a premium of "comfortably above" £100,000 over a lifetime."

Later, Alan Williams threw another figure into the potage:

Q153 Mr Williams: The Department’s estimate was £120,000 a couple of years ago, was it not?

Ruth Thompson: The Department’s estimate that we now use is comfortably over £100,000 net and discounted to present values.

Q154 Mr Williams: Comfortable is a relative term, is it not? It is as relative as your 50% figure. What is "comfortably over 100,000"?

Ruth Thompson: I am unable to give a precise figure because it moves about.

It sure does Ruth.

Now the way these mandarins talk about their graduate lifetime earnings calculations, you'd think they were at the leading edge of experimental economics: 2002's £400,000 figure was an early result that through unstinting labour and matchless diligence has since been refined down to a state of the art £100,000.

That is complete and utter balderdash. Your correspondent will now break the Official Secrets Act to reveal he personally worked on such calculations over 30 years ago while a civil servant at the Department of Education. And it was hardly new even then.

The truth is that Labour's policy to expand higher education came first, and the "evidence" was cobbled together afterwards. And the only reason that grossly misleading £400,000 figure was cooked up was to provide cover for DfES ministers pushing through Brown's order from the Treasury to raise tuition fees. Simple as that (and see here).

As we've blogged before, that £12bn pa on higher education pays for 2.3m students, or 4% of the entire population (including 27,000 doing our old favourite, the degree in media studies). Participation is still being ramped up, even though according to the OECD, at 39.3%, our graduation rate is already above the 34.8% average, and ahead of both the US (33.6%) and Japan (36.1%).

Unsurpisingly, the economic return to higher education is falling as supply increases. And for many of the new degree subjects at the new universities it is close to zero, or even negative. The latest published study from PWC (2007) shows how the discounted lifetime gross earnings premium for arts subjects has already fallen to a mere £35,000, and that's before taking account of earnings foregone while at college, and tuition fees:

Like so much else, the 50% participation target is based on nothing but ideology and wishful thinking. It is a stupidity Britain cannot and should not afford.

*Footnote. Yes folks, you can obtain an absolutely genuine 100% certifiable degree in five days for just $130. You'll get a real certificate and everything (and no cheap stick-on seals like some competitors offer). It takes less than one minute to order, and it will be worth at least as much as a degree in Fanzine Studies from the University of Neverpay.

Half-baked Rock 2

All the selected and graded ones went to Granite

Are we all up to speed with Northern Rock's offshore financing vehicle Granite? It has featured heavily in the debate this week as it finally dawned on everyone that a big chunk of NR's mortgage assets has already been pledged to Granite as security for its wholesale borrowings, and they are therefore excluded from the assets being nationalised.

We've blogged Granite many times before (eg see here). Last November we explained its significance thus:

"Not all creditors are equal. Some have claims that rank a long way ahead of ours... At the top of NR's claims tree are the secured creditors. They are people who've lent money specifically secured against a chunk of those high quality mortgage loans we've heard so much about... Those mortgages have been ringfenced, most via NR's complex offshore financing vehicle Granite, for the benefit of investors in its Medium Term Notes. Others have been assigned to a presciently constructed "bankruptcy remote special purpose vehicle" as security for NR's Covered Bond programme."

Now for taxpayers, there are two key problems with this.

First, the mortgages that have been pledged to Granite are almost certainly the best quality ones NR has. Which means the stuff we're left with- the "unencumbered" rump- contains a concentration of dodgy loans, including all NR's unsecured lending.

Second, the value of the mortgages pledged to Granite exceeds the value of the loans raised through Granite. In other words, Granite is "overcollateralised". That's standard practice with these vehicles, and largely explains why the Crock was able to borrow more cheaply through Granite than directly on the market: Granite's investors know they have a safety cushion of overcollateralisation in the event of mortgages defaulting and are therefore willing to lend at a lower average rate.

But of course the converse is also true: lenders to NR directly have less security, because the assets backing their loans and deposits are reduced by the amount of Granite's overcollateralisation*.

Thus Granite hits taxpayers two ways, greatly increasing our exposure to default on the Crock's mortgages and other loans.

But there's more.

As we've blogged before, Granite imposes other obligations on NR: it isn't "fire and forget" funding. In particular, NR is obliged to maintain Granite's pool of mortgages as they get repaid. It has to replace redeemed mortgages with new ones of comparable quality and characteristics. If it doesn't do that, "the trustees of the fund could call for a “rapid amortisation” of Granite, which would require bondholders to be paid back in full."

In other words, there'd be a fire sale of assets, in which Granite's trustees would act purely in the interests of bondholders. They'd probably be fine because they could afford to use that overcollaterisation to cut prices. But for taxpayers it would be very costly: they'd certainly lose as the mortgages were sold off cheap.

Which of course is why Ron Sandler may find it difficult to stop NR extending new mortgages- he has to keep the pipeline going or risk Granite going into "rapid amortisation".

What a mess.

So what's the scale of the problem? What's the likely damage?

As usual it's difficult to tell because we've had no proper accounts from the Crock for months, and Darling won't tell us anything (after all, we're only the taxpayers). But the number that's been bandied about is £49bn.

Of that, a wedge will be the overcollateralisation. Last November, the Economist reckoned it was £7bn; the current estimate is around £6bn. Either way, that's a big chunk of taxpayer value at risk.

And that's without considering the fact that Granite forces us taxpayers to hold the lower quality assets. For example, as at end-June last year, £8bn was unsecured personal loans, including NR's "Together" top-up loans for mortgagees, which could take their combined loan up to 125% of their house value.

There's so little hard information about NR's true financial position, we can't really put a figure on our prospective losses. But as we said the other day, given the prospects for the housing market and NR's mounting problems with bad debts, a £10-20bn loss is by no means inconceivable.

*Footnote: Granite is an excellent example of financial sleight of hand. By bundling its highest quality most secure mortgages off its main balance sheet, and adding in a fat collateral cushion, Crock was able to borrow at lower rates in the international wholesale market. But its existing onshore lenders and depositors (in particular Mr and Mrs Joe Public) were left lending to an entity that was correspondingly much less secure. Of course, they had no idea what was going on and imagined NR was just the same old safe-as-houses High St presence it had always been. What a shame we didn't have a financial regulator full of bright savvy people, poring over the books and blowing the whistle before things got out of hand. But all we had was Brown's hopeless FSA.

Non-job of the week

If you read between the lines of every non-job description you can see even more of your money going up in smoke.  After getting over the initial shock that we – me, you, the taxpayers down the street – are paying for this non-job, you read on to find that considerable resources have not only gone into this job, but also the ‘strategy’ behind the job.  Yes, that’s right, for every non-job, someone’s sat at a desk devising a strategy for it.  I don’t know what’s worse, wasting money or devising strategies to waste even more taxpayers money.  But yet it still continues in local government and, even more depressingly, local NHS Trusts.

We’ve been fed the line as long as the welfare state has been in existence that taxes need to go up to pay for health, education etc…

However, are our taxes going to health and education?  Look at this non-job and tell me if you think your money’s being spent on those frontline services the politicians tell you you’re money’s going to:

There you have it taxpayers’ money, £37,000+, going to pay for someone to stop you falling over (a glorified banana peel collector?) but there’s someone in the Herefordshire PCT who has devised a ‘Falls Prevention Strategy’.  There are times like these where nothing else needs to be said except that if you’re riled, angry and frustrated that the government are routinely wasting your money – do something about it.  Join our campaign for free here, register as an activist and tell people about the TaxPayers’ Alliance.  Alternatively, donate to our campaign here.  This is your campaign to stop the taxman getting his hands on your money, so we’re counting on you to do your bit!

Half-baked Rock

Bake before serving

The thing about rock cakes is that they need to be properly baked before serving. Mssrs Brown and Darling clearly haven't grasped that.

Unsuprisingly, the Crock's rivals are now highly agitated about its unfair competitive advantage as a state bank. Unsurprising when Northern Rock can offer a market leading 6.49% instant access acoount, fully guaranteed by HMG.

The Crock's management has a strong incentive to rinse the guarantee for all it's worth. They are chasing retail deposits to replace their notorious dependence on wholesale funding and to repay the Bank of England loans. But 6.49% and the guarantee really is taking the mickey (National Savings instant access account currently pays 2.35% - 4.90%). No wonder competitors are angry.

So obviously Darling has a plan for managing this, right? Obviously he will have spelled out precisely how the guarantee may and may not be used, perhaps even capping the rates NR is allowed to offer. Right?

Er... wrong. All he says is:

“While we will not be involved in the day-to-day management of Northern Rock we do need to approve its business plan. We want to make sure that it is prudent, that it is sensible and it protects the interests of the taxpayer but also we want to make sure that it avoids distortions. The business plan, if it was built on taking advantage of the present temporary Government support, would not be consistent with our general aim of so running the bank to reduce and then remove that level of support.”

Translation: oh... er... yes... I see what you mean: well, we never thought of that... let's hope they can come up with something... we're certainly paying them enough.

As we've said before, it's impossible to imagine the Crock surviving without its deposit guarantees. Quite how Darling expects the new management to achieve that is beyond us, and certainly beyond him.

Meanwhile, Goldman Sachs may be regretting getting involved in this sorry saga. There was never a serious chance they could find a magic solution, and the real reason they were appointed is fingered by the FT:

"It is a sure sign of how far the credibility of Britain’s “tripartite authorities” – the Treasury, the Bank of England and the Financial Services Authority – has fallen that the government’s public statements on the nationalisation of Northern Rock give a prominent mention to the plan’s endorsement by Goldman Sachs."

They were there simply to give Brown some cover. Unfortunately, for them, the real trouble is only just starting:

"The bank is in the line of fire in the short term for the fee it is charging (never mind that it is likely to be lower than for similar advice to private-sector clients), and could yet be dragged into a long and messy process of litigation about who said what to whom and when. The opposition Conservatives are already asking the government to publish the advice it received from Goldman.

A bank as careful with its reputation as Goldman will have weighed those risks before taking the mandate. But the truth is that when a G7 government asks for help, it is hard for a bulge-bracket bank to turn it down – almost irrespective of the consequences."

For regular readers of BOM, this will have a familiar ring. Many private sector firms have done extraordinarily well out of the business ladled out by this government, often on terms which have delivered very poor value to taxpayers. But more and more of them have come to realise it's a double-edged sword. They are often asked to deliver the half-baked or even the impossible, and when things go wrong- as they usually do with politicos in charge- they are right up that creek with no paddle in sight.

Reputable companies would be wise to remember that the next time some juicy government contract gets dangled before them. Or even a half-baked rock cake.

Darling/Osborne Fiscal Policy Meets The Eighties

A warning from history

We've already blogged George Osborne's latest tax speech, and our disappointment that he's still not prepared to offer a bankable pledge on cutting Labour tax'n'spend (see here). As far as we can see, there's no meaningful difference from what Darling set out in October.

Corin Taylor has already picked him up on one point he made, which was that cutting spending growth below Labour's planned 2.1% pa would be to "head off onto the margins of the political debate," chasing a target that "would be lower than anything Margaret Thatcher achieved during the economic turbulence she faced in her first parliament".

Corin sets out the history of real public spending growth for the last 35 years so we can see the whole picture. He argues that although spending did indeed grow by more than 2.1% pa during Thatcher's first parliament (2.3% pa to be precise), it was an extraordinarily turbulent time. Over her whole period in office she got spending growth down to 1.5% pa, even taking account of the higher growth in the early years. He asks:

"Now, is it really correct to say that 2.1 per cent per annum spending growth is tighter than under Thatcher?"

We've taken a closer look at that turbulence during Thatcher's first parliament, asking how much of Thatcher's 2.3% spending growth was actually down to a weak economy, and its impact on welfare and other cyclical spending? After all, the Darling/Osborne plan is stated on a cyclically adjusted basis- ie if growth turns out lower than assumed, spending will be allowed to flex upwards from his planned 2.1% pa. Camparisons are only meaningful if we look at Thatcher's record on the same basis.

From 1979 Q2 to 1983 Q2, as Thatcher wrestled that horrific hangover from the dismal seventies, real GDP shrank by nearly 1%. Yes, that's right, over the whole four year period the economy got smaller (see here).

But according to HM Treasury, trend GDP growth at the time was 2% pa. So as actual GDP fell, there opened up a huge gap between that and potential trend GDP. In fact, by the end of Thatcher's first term the Treasury reckons this output gap was between 6 and 7 per cent:

Just let that sink in. A 6-7% output gap means that GDP is massively below its full-employment level. In today's terms it would be equivalent to us losing around £100bn pa from our national income, or £4,000 per household. That is serious turbulence.

And obviously it put serious upward pressure on government spending. But how much?

Luckily for us, adjusting public finances for the cycle has become a major state industry under Gordon Brown, so we can turn to the Treasury's own ready reckoner.

The key Treasury paper was written by Ed Balls when he was still at HMT, and has been used ever since as the basis on which they cyclically adjust the public finances for Golden Rule purposes. It says:

"a 1 per cent increase in output relative to trend is estimated after two years to reduce the ratios of Total Managed Expenditure and Public Sector Current Expenditure to GDP by about ½ percentage point"

Flipping that round for the Thatcher experience, a 1 per cent shortfall in output relative to trend is estimated after two years to increase the ratio of public spending to GDP by about ½ percentage point.

Which means that Thatcher's spending total in 1982, with GDP 6-7% below trend, needs to be cyclically adjusted (downwards) by an amount equivalent to 3 - 3.5% of GDP.

Now that gives us a very different picture of spending restraint in Thatcher's first term. In 1982-83, Total Managed Expenditure (TME) was running at 48.7% of GDP. Cyclically adjusting that by 3% or so reduces it to 45.5%. Translated into spending, that's a cut of over 6% in the unadjusted total.

When she came to power in 1979, HMT's figures suggest the UK economy was roughly on its longterm GDP growth trend (see chart above). So we need to credit her with the whole of that 6%. In other words, whereas her first term saw unadjusted public expenditure grow by 2.3% pa, or a total 9.5% over the four years, cyclically adjusted that falls to about 3% overall, or about 0.8% pa.

When George Osborne talks about his proposed 2.1% pa public spending growth being as tough or even tougher than Thatcher, he's totally disregarding this entire cyclical effect. Cyclically adjusted, Thatcher's first parliament held spending growth to well under 1% pa.

Yes, it was politically difficult, but she and her ministers did it. And they laid the foundations for the prosperity we've been living off ever since.

What does this mean for the current debate?

Well, the Darling/Osborne spending plan assumes GDP growth of 2.5% pa pretty well into the indefinite future. But what if it doesn't materialise? What if we get whacked by another bout of eighties-style hangover? What if say we don't get any growth for the next four years?

Four years of zero growth would leave us 10% below the Darling/Osborne GDP assumption, and public spending growth would balloon. We could forget 2.1% pa - using that same HMT ready reckoner, on current plans, public spending in real terms would grow by well over 5% pa.

Within one parliament we'd be right back up to government spending around 47 - 48% of our GDP.

Osborne talks about heading off into the margins of political debate, but he should at least recognise that Thatcher's first administration was far tougher on public spending than he plans to be.

He should also think about how he'd handle four years of minimal growth locked into Darling's spending plans. How exactly would he stop public expenditure crushing the economy just as it did in the low growth seventies? We can see how Thatcher did it: what's his plan?

Northern Rock Bills Now Coming In

Financial engineers sort out Northern Rock

The government likes to pretend the Crock rescue won't cost taxpayers a bean.

Thus yesterday, Chief Secretary to the Treasury, Yvette Cooper, toured the studios (eg here) telling us that the government guarantees given to Northern Rock "have not been called upon, so they've not actually created any cost for the taxpayer".

So we've guaranteed large chunks of the Crock's liabilities (see here), but because we haven't had to pay out yet, it's been costless.

In which case, you might ask why insurance companies bother to go through all that tedious reserving stuff when they take on risk? Surely, unless and until they have to pay out, their business must be money for nothing. And what about those monoline bond insurers? Until the late unpleasantness with all that sub-prime debt they were creaming in premiums and not having to part with a cent. It was a costless business... well, costless until the claims arrived, anyway.

Does Cooper actually believe this stuff? She's meant to be quite bright, so possibly she doesn't believe it herself but knows that financially illiterate interviewers will never pick her up on it.

On the other hand, she's in the team that's so far managed to dig us in for a hundred billion, so it's quite possible she's just repeating the groupthink. As long as they keep the guarantees in place then they will never be called on and will never give rise to any costs. Simple.

It reminds us of all those fearfully clever international bankers who used to tell themselves modern states couldn't go bust, and therefore Latin American countries would always repay their debt, no matter how monstrous. Wonder what happened to them? After Mexico went bust in '82 they went a bit quiet.

Inconveniently for the government, the real underlying costs of the Crock debacle are becoming visible. This morning we've had more detail of the charges and fees levied by banks, lawyers and other assorted advisors. The total bill so far is £100m, including:

"Goldman Sachs, the investment bank, and Slaughter & May, the legal firm, stand to share between £15 million and £20 million for advising the Treasury on the sale.

Northern Rock – and therefore the taxpayer – is also set to pay its bankers at Blackstone, Citigroup and Merrill Lynch, and its lawyers Allen & Overy and Freshfield Bruckhaus Deringer, about £75 million in fees, including a £25 million success fee.

Sir Richard Branson’s consortium and a management team that also bid for the bank will each receive £5 million from the Treasury to cover part of their costs. There was also the prospect of further legal bills for the public purse."

Cooper ludicrously insisted on yesterday's Newsnight she didn't know the details, and that anyway the fees incurred by the Crock itself were not down to taxpayers. But we can all recognise a feeding frenzy when we see one.

And it's by no means over. Apart from anything else, Ron Sandler's job (hopefully) is to run down NR and sell off all the good bits- just like has already happened with that £2.2bn equity release portfolio sold to JP Morgan (see this blog). But even assuming he gets a good price for all of that, we can expect further chunky advisory fees.

Worse, somebody's going to be left with the stuff that nobody else wants. The assets that turn out to be worthless. Guess who that will be.

PS For an overview of the £3bn pa the government already spends on external advisors of various kinds, see this blog.

Northern Rock- Three Questions From Taxpayers

Over here Chancellor

Now that our dithering "government" has finally pulled the trigger on nationalising Northern Rock, taxpayers are formally and irrevocably on the hook for up to £110bn (we don't know how much because we haven't seen any proper accounts for months).

For taxpayers, there are three key questions.

1. How bad is the loan book?

Despite constant government assurances that all its loans are "high quality", we have always feared NR's loan book will not stand up to a housing market downturn. With house prices now falling, our fears are being realised.

As we blogged last night, NR's mortgages in arrears leapt by 20% in the second half of 2007 and now stand at £1bn. Repossessions doubled in December, and mortgages worth more than the value of the property are increasing rapidly.

We don't know what we don't know, but the portents are grim. And we should remember that with the bank in public ownership, when it comes to taking losses, there are no longer any private sector shareholders ranking below us. A £10-20bn loss is quite conceivable.

2. Will we be forced to pay off shareholders?

The government says it will appoint an "independent valuer" to assess what if anything NR's shareholders should be paid for their stake. But as we've long argued, without the taxpayer bail-out NR would have gone bust months ago. The shares have been trading in a false market, and it would be outrageous if taxpayers are now made to pay compensation.

As for the hedge funds SRM and RAB suing the government for compensation, our wibbly wobbly government must somehow be strong. These funds bought in only after NR's problems surfaced, and their profits were always going to depend on facing the government down (cf Soros during the ERM crisis in 1992). They may argue that NR's net asset value is £4 a share, and threaten to sue for European Human Rights, but the government must be robust.

3. What's the corporate plan?

Darling told us yesterday:

"It is better for the Government to hold on to Northern Rock for a temporary period and as and when market conditions improve the value of Northern Rock will grow and therefore the taxpayer will gain. The long-term ownership of this bank must lie in the private sector".

That's very bad news for taxpayers. As we know only too well, there are no credible private sector buyers anywhere in sight, and market conditions are deteriorating. Taxpayers have had very bad experiences with nationalised companies and there's certainly no reason to think it will be any better under Brown and Darling. The least bad plan for taxpayers is to run-off the assets in an orderly way, and to close or sell the operation.

Let's hope new NR chief Ron Sandler, now being paid £90,000 per month to sort out the mess, understands the real world better than our rulers.

PS There are of course a number of other subsidiary questions taxpayers would like answered. Such as how much Goldman Sachs has been paid to come up with that dud financing plan?

The Real National Debt

Tip of the iceberg

We've updated BOM's estimate of the Real National Debt. That's the total debt taxpayers are actually committed to paying, as opposed to the much smaller figure Brown admits to in the official statistics.

But before we start, and just for fun, let's remind ourselves of what the Great Enron Accountant told us in his 2001 pre-election Budget speech:

“From the unacceptable level of debt we inherited — debt at 44 per cent of national income — I forecast debt in the coming year will fall to 30.3 per cent and in the following years I project 29.6, 29.7, 29.9 and 30 per cent successively. . . putting Britain in a far stronger position to deal with the ups and downs of the economic cycle”

And can't you just picture his smile of satisfaction as he said it.

He's constantly reminded us how thanks to him, we've had the longest unbroken period of economic growth since the dawn of civilisation. Yet the government's debt has gone on increasing, and we're now facing the first economic downturn for nearly two decades with all credit cards maxxed.

We start with the official National Debt- Brown's figure, as published by the Office for National Statistics and charted above. When last sighted (figures up to Dec 2007), that was £536.5 billion, or 37.7% of GDP. So still within Brown's 40% rule. But...

We first need to add PFI debt. According to HM Treasury, its discounted present value is now £91bn, but since that ignores this year's new commitments and all payments beyond 2031-32, we'll round it up to £100 bn (see this blog), of which a mere £5bn has been counted in by the ONS.

Next up, we must add the liability for those unfunded public sector pensions (eg see this blog). According to the latest estimate from the IEA, that's another £1,025 bn.

Then we have the cost of decommissioning our old nuclear power stations. That's an explicit taxpayer liability we reckon comes in at around £70bn (see this blog).

And don't forget Northern Rock's £100bn debt, now formally added to the public sector balance sheet by the ONS, even though they haven't yet crunched the precise numbers (see this blog).

Add in Network Rail's debt at around £21bn, all fully guaranteed by taxpayers but excluded from the government's balance sheet.

The grand total is £1,847.5bn. Or 130% of GDP.

Or £74,000 of public sector debt hanging round the neck of every single household in Britain.

PS Even our £1.85 trillion figure excludes one of the really scary numbers. As we've blogged before, if we include the commitment to pay those totally unfunded state pensions, the total debt figure increases to around £9 trillion. Or £360,000 for every household

Relocated Newcastle

How hard can it be?

By any normal standards it beggars belief: following the classic schoolboy geography howler the hopeless Department for Communities and Local Government has given a £2.7m grant intended for Newcastle on Tyne to Newcastle-under-Lyne instead. The two being a mere 186 miles apart.

What are the lessons?

First, all local councils in the South that have been systematically starved of government money to fund Labour's fiefdoms, should rename themselves soonest. If Kingston-upon-Thames became Kingston-Upon-Hull, it would definitely get its snout into the Prescott family trough (the two names are so close it probably already happens). And Guildford could become Gateshead- there's no way DCLG's finance gremlins would then be able to distinguish it from our friends up North.

Second, this underlines just what a shambles the regional aid bureaucracy is. We've blogged at length on Regional Money Spaghetti, pointing out the system's mind-boggling complexity. This case underlines just how dysfunctional it is, and you can bet it's not the only such cock-up. The system has no common sense over-rides and is operated by people of such low grade they make mistakes like this.

Third, this is yet another example of poorly government looks after our money. We've blogged this many times (and see the ITBA vid here)- throughout government, the actual handling of money is mostly in the hands of quite junior staff (even temps) operating in a twilight world well below decks, and well away from the senior officers on the bridge. If the accounting and control systems were secure that might not matter, but of course they're not. Billions go astray every year (cf tax credits and DWP).

Maybe DCLG's geographically challenged payments clerks should be issued with satnav.

Better still, the whole multi-billion mess of regional money spaghetti - Regional Development Agencies and all - should be scooped up and chucked in the wheelie bin.

Non-job of the week

Today’s non-job of the week is a tale of two job adverts.  The first is our non-job of the week, yet another example of misused and misplaced scarce resources.  The next is a job within a charity which you will read about later.

But first, reading these non-jobs every week I’m left thinking whether we should undergo research into how much the equality and diversity industry costs the taxpayer.  Essex County Council – aside from spending £36 million on middle management and £4 million on its own self promotion – now thinks Essex taxpayers should fork out £86,000 minimum for a ‘Customer Impact Manager’.  What, I hear you ask, is a Customer Impact Manager?  Well, read on and find out as we present to you our non-job of the week:

“Customer Impact Manager

£66,000-£86,000 with more available for an exceptional candidate

Essex Works.

IT WILL BE NICE IF YOU WIN FRIENDS.

BUT IT'S ESSENTIAL THAT YOU INFLUENCE PEOPLE.

Change Everything

From £66,000 - £86,000 with more available for an exceptional candidate

With backing at the very highest level, your objective will be nothing less than to capture the hearts and minds of thousands of people right across this massive organisation, inspiring them to change the way they work to deliver the best quality of life in Britain. As our new Customer Impact Manager you'll champion the Local Government Equality Standard and ensure its values are embedded within service planning throughout an authority serving 1.4 million people.

Confident and highly credible, you should have a good understanding of local government and real empathy with the equality and diversity agenda. Proven ability to deliver change within a large, complex organisation is a must, together with highly developed influencing and motivational skills.

For further information, please refer to the Saxton Bampfylde website (http://www.saxbam.com/jobs) using reference LESF, or request an information pack by telephone on +44 (0)1483 409713.

For a confidential discussion about this opportunity, please contact Steve Lemmon or Jo Austin on +44 (0)20 7227 4069.

The closing date for receipt of CV's is 29 February 2008.

Preliminary interviews will be held between 3-14 March 2008 and final interviews on 10 April 2008.

http://www.jobsatessex.co.uk

Achieving quality through equality

SAXTON BAMPFYLDE HEVER

THE AMROP HEVER GROUP

Essex County Council

POSITIVE ABOUT DISABLED PEOPLE

INVESTOR IN PEOPLE”

The bold and italics are my doing, the capital letters are theirs and emphasise the sheer excitement Essex CC must have in advertising for this example of wasteful middle management.  Clearly a job that tries to “ensure its values are embedded within a service” is not actually delivering a frontline service to taxpayers.  It’s servicing the service.  Why?…nobody knows.  We have perfectly good equality and diversity laws that seem to be working well.  Got a problem, take it to a tribunal.  Job done! Or rather, non-job done!

Now for the comparison.  Essex County Council’s non-job measures 30 centimetres by 15 centimetres on the fourth page of the Guardian society jobs page.  It’s a taxpayer funded advert for taxpayer funded position that barely provides a frontline services and goes to swell up middle management even more. 

Now compare this with a 6 x 6cm job advert from the Sir Oswald Stoll Foundation, a charity funded by the Royal British Legion that provides homes and support to vulnerable and disabled ex-servicemen.  The Essex County Council middle management post is advertised on page 4 of the Guardian jobs section, right at the top of the page.  The advertisement for The Sir Oswald Stoll Foundation is tucked away on page 9 at the bottom of the page, completely secluded.

One could say the OSF has such a small advert because they want to channel all their funds to serving those in greatest need.  If so, this is a lesson for local government to heed before it spends millions of pounds on self congratulatory publicity and middle management jobs far removed from frontline services.

Dole Scroungers

At least they're upfront about it 

Dole Scroungers is based in sunny Brighton. It campaigns for better welfare entitlements and gives advice on how to extract more cash from taxpayers.

Less than an hour from London, full of pink pounds and posh houses, you might think Brighton wouldn't have much of a problem with dole scrounging. But you'd be wrong: if you've been there anytime in the last twenty years, you'll know it has a substantial population of working age welfare dependents. It seems such people are attracted to Brighton, and in consequence its unemployment rate is twice the regional average.

But Brighton isn't alone. All over the country there are similar stories, and it seems never a week goes by without some especially eye-catching report. A recent one from Manchester told of how an educated man had thrown up his job because it was too stressful. Now he, his wife, and their eleven children are drawing £29,096 a year in benefits from taxpayers. He says:

"For many years I worked in Derby as a teacher, earning £27,000 a year, and Noreen would be at home with the kids. I would come home at weekends. Then I moved back to work in Manchester and took a pay cut to £24,000. It was a load of c***. I was teaching at a college and I'd be up at 5.30am with the kids then have to go to work. I just couldn't be a***d with sitting in traffic. I'd be sat in traffic for hours and I felt like I'd done a day's work by the time I got there, I was so stressed."

We may feel his behaviour is reprehensible, but who can say he's not acting rationally? He's financially better off on benefits, he doesn't have the stress of work, and he's even got time to plan their twelfth child.

What's the big picture?

We've taken a look through last week's Public Accounts Committee report on welfare to work and the shortcomings of the New Deal programme. It received extensive press coverage for its shocking overview of working age welfare dependency in Britain today. Based on an NAO report and a PAC hearing last October (blogged here), it makes the following key points:

• Over 4.3 million people of working-age and 1.79 million children are living in workless households- ie 6m people (10% of Britain's entire population) are living in 3m households where one or more adults is of working age but nobody works, and the household is entirely dependent on state welfare
• 16% of working age households are workless
• These households cost us at least £12.7bn pa in welfare payments (nearly 4 pence on the standard rate of income tax for the rest of us)
• In 80% of the households, nobody is even seeking work
• The government reckons 2m of these people can be put to work, including 1m currently drawing incapacity benefit and 0.3m lone parents, but...
• The New Deal welfare to work programmes have no coherent strategy for reaching those not seeking work (ie those not in receipt of Job Seekers allowance)
• Most of the programmes are inefficient, costing taxpayers more than they save in terms of reduced welfare costs etc
• Management information is shockingly poor, with for example no record of how many people going onto New Deal programmes never actually graduate into jobs

As we all understand, welfare dependency is one of the most corrosive forces going. But the New Deal programme has run into the sand. It may initially have helped easy to place job seekers into work, but it's having virtually no success with this hardcore 4.3m, 2m of whom even the government admits are capable of working.

According to the PAC, 60% of workless households are concentrated in just 10% of our council wards. Brighton aside, they are mostly in the familiar areas where employment opportunities are most limited (North East, South Wales etc).

The Big Government solution is to hope it can somehow create jobs in these areas paying enough to tempt people off welfare. But unfortunately their productivity is often insufficient to generate pay high enough to do that. Which is a problem that even David Freud's plan to use private sector back-to-work agencies is unlikely to solve entirely.

The alternative market solution is to cut welfare entitlements- especially in low wage areas- so that the attraction of paid employment is much more evident to all. It may sound harsh, but quite simply, the man from Manchester and people like him should not be better off unemployed, dependent on taxpayers and even incentivised to produce ever more children. Despite what he says about stress, most of the evidence is that paid employment brings all sorts of other benefits besides cash, such as improved mental health.

There are no prizes for guessing which of these two solutions is more sustainable in the long-term.

Waste On Waste

Processing those Gershon efficiency audits

News today that Brown's Gershon... ahem... efficiency programme has generated yet another additional cost. This time it's the £432m paid to 7,717 civil servants made redundant under the plan.

Most chokingly for taxpayers, the mandarin in charge, John Oughton, himself got a £612,000 golden goodbye when he took early retirement from his post as the chief executive of the Office of Government Commerce last year at the age of 54.

We've blogged the useless Gershon programme so many times it hurts. But let's just remind ourselves of the key features (see here for more detail):

• Launched in 2004, Brown reckoned it would generate £20bn pa of "efficiency savings" by 2010, including a net job cut of 70,600
• Last October Darling announced the £20bn had already been achieved
• The truth is that only a quarter of these announced savings are "reliable", so the £20bn translates into around £5bn (according to the National Audit Office- see this blog)
• Even where the cuts are genuine, service standards have slumped- eg hospital stays have been cut but emergency readmissions have soared
• Unintended consequences have been even more expensive than usual with such half-baked government programmes: eg the cuts fueled fiasco at the Rural Payments Agency cost taxpayers £0.6bn, and the cuts fueled fiasco at HMRC is potentally costing us billions (the black market value of those lost bank account details is c £200 apiece)
• The programme has spawned a whole new Whitehall bureaucracy, complete with its own mandarins (the chief of whom has now copped that £600 grand early retirement package), accounting gremlins, and mountainous reports

And on top of all that, we've now been landed with £432m redundancy costs.

Outstanding.

This whole nonsense is now very close to costing us money.

Top-down programmes to tackle government waste sound like they have to be good idea. But history tells us they very rarely work. Yes, you can cut costs: that's easy. But those unintended consequences have a nasty habit of delivering even bigger bills than the ones you've avoided.

Government is by its nature inefficient. It is a tax-funded monopoly with no competitive pressures to keep it fit. There are no alternative providers trying alternative approaches, and to whom customers can switch.

The failure of the Gershon programme highlights once again why our main priority should be to find ways of dismantling our Big Government wherever possible. These grandiose top-down efficiency drives simply don't work.

£100bn Northern Rock Debt Moves On Balance Sheet

Another £100bn added to the debt millstone

Yesterday the Office for National Statistics formally moved the Crock onto the public sector balance sheet. So for the first time we have official recognition that the bulk of its debt is hanging round taxpayers' necks.

The ONS hasn't yet crunched the exact numbers, claiming that "it was not possible to collect the relevant data from Northern Rock plc in advance of this announcement and it would have involved disclosing commercially sensitive information. However, the reclassification will be reflected in the Public Sector Finances dataset as soon as possible."

Translation: the Treasury has threatened us with exile to Tyneside if we publish the new Fiscal Rule busting debt total ahead of the March Budget.

But the spin from the statisticians is that the total addition will be "around £100 billion". Which is very interesting. Because, although that's always been BOM's figure (eg see this blog), until now, the official line- relayed by the BBC's Robert Peston et al- is that the figure is "only" £55bn. What's more, the ONS dates the liability from "9 October 2007, when the support arrangements provided by the Bank of England were amended". BOM readers will recall that's when a panicking Mr Darling extended HMG's guarantee to cover pretty well all deposits (see this blog).

The other fascinating aspect of the ONS announcement is the reason they've brought NR's debt into the public sector. It's not- as you or I might have imagined- because we taxpayers are now on the hook for servicing and repaying it. No, it's because post-9 October:

"the public sector has the power to control Northern Rock plc’s general corporate policy. This is largely due to powers that the Bank of England has taken as part of its secured lending facility arrangements through covenants in the loan agreements. While amounts are outstanding under this loan, Northern Rock plc requires permission from the Bank of England before undertaking certain activities – for example, entering into any corporate restructuring; making substantial changes to the general nature of the business; making dividend payments; and acquiring or disposing of certain types of assets."

To which one immediate response is to ask why on earth are these shares still trading? If the government's control is officially recognised as being this complete, it's surely a classic false market. And this goes way beyond loan covenants: virtually all debt finance has covenants attached, limiting the corporate actions of borrowing companies, but HSBC doesn't have to take Widget PLC onto its balance sheet just because it extends it a covenanted loan. Bond holders aren't responsible for the debts of the companies whose covenanted bonds they buy.

Another question- what happens if and when the Virgin take-over goes through? Will the Crock move back into the private sector?

As we've blogged many times, the reality of such a take-over will be continued taxpayer support, both through loans and deposit guarantees. At the very least, taxpayers should demand any such deals are heavily covenanted. But then, on ONS logic, the Crock would remain on the public balance sheet, blowing the Treasury argument that this is "temporary", so shouldn't count for fiscal rules puposes.

Unless that is... unless... oh no... surely even those naive bunglers Mssrs Brown and Darling aren't intending to give Sir Richard huge uncovenanted dollops of our money. Are they?

There's one final point. A large chunk of our exposure to the Crock is in the form of guarantees rather than outright loans. In the real world, that makes no difference whatsoever in terms of the economic risk we're bearing. But in the arcane world of public sector accounting, contingent liabilities don't count.

It's a nonsense very familiar to BOM readers. Just a few days ago we blogged the £73bn of taxpayer liability for decommissioning Britain's nuclear power stations- nowhere does that appear in the official public debt figures. Likewise, Network Rail's £20 odd billion of debt, fully guaranteed by taxpayers, does not appear in the National Debt. Even though we're on the hook for payment: they are "contingent liabilities".

We're currently reworking our figures for the real national debt. Last time we did the sums it came out at £1.7 trillion (eg see here). We'll post our updated total next week.

Lackadaisical And Arrogant

The cost of those PFI plug sockets

Yesterday afternoon your correspondent attended the latest Public Accounts Committee session on PFI. On the table was the recent NAO report on how the public sector gets ripped off when it orders changes to long-term contracts (blogged here) On the griddle was John Kingman, the Treasury mandarin in charge of PFI, and his two wingmen.