Following on from the article on Job Creation & Fairness (see Categories/Chairman?s Blog/Fairness/Job Creation in the right-hand index column of the opening blog page), something further on the related development of the necessary private sector financing of job-creating projects for public services seems appropriate, when government funds are severely limited as in the austerity climate of today.
One method has been via the so-called Private Finance Initiatives (PFIs), when sources of finance such as banks & investment companies have got together with the required project management, planning, engineering, implementation and operating companies in consortia, and been contracted to Build, Operate and ultimately Transfer (BOT) back into full public ownership, key capital assets such as schools and hospitals. The private consortia are paid back over the operating life of the contract through interest on the investment capital and service charges on the operation; the benefit for the government is to reduce its front-end capital expenditure by spreading the payback over a number of years e.g. until 2041 in the case of the Coventry University hospital PFI. Indeed, by 2041 this hospital will have cost the taxpayer £3.3 billion in interest and service charges, according to Treasury figures, some 8 times its value today (as quoted in the Times of last Sunday).
Many of the over 650 of such PFIs in the UK were set up under Labour to fund the building of new schools and hospitals, using private sector money, to thereby reduce government capital spending at the time by diverting it to future generations of taxpayers, even in the then period of relative prosperity compared with today. It raises questions on the political motives of the government behind such building programmes, as well as their number and necessity during this period.
As Sir Philip Green suggested in his recent Efficiency Review (see Categories/Chairman?s Blog/Sir Philip Green/Efficiency Review in the right-hand column index of the opening blog page), the government needs to improve in its negotiations with the private sector. This can be particularly so in the case of such long-running contracts when e.g. the escalation clauses associated with the on-going service charges for operating a hospital complex, can sometimes lead to levels considered exorbitant over the long term. MPs have apparently, therefore, now formed a 50-strong cross-party group to try and renegotiate PFI contracts because of their total accumulating costs to try and secure taxpayers a rebate which could save up to an estimated £500 million. Although it is said that at the moment PFIs are contractually protected from government cutbacks, there is often the case of major companies in the private sector calling on their suppliers to reduce their contracted supply prices to them, when times are tough. Today there is even a secondary market trading in PFI equities with school and hospital ownership passing from one company to another and e.g. Innisfree the contractor for the Coventry University hospital is now the biggest owner of British schools after the government!
The above is not to say that the private sector should not make a decent profit; profitable companies are key for growth and job creation. It is also all too easy for the media to pick up and colourfully quote things the general public can relate to such as seemingly excessive service charges for items such as car parking for hospital staff, patients and visitors, hanging pictures and installing TVs, school computer equipment and desks etc. This can tend to trivialise the matter somewhat and cloud the overall issue. The government might also find this the case with its plan to put on-line for the general public, the annual budgetary spending details and progress against associated milestones (instead of the previous and so-called Labour targets) of its various departments, in order to reduce the role of central government and quangos. The announcement of the release of such a mass of detail to the media and an anxious, unhappy public (without sufficient selling of the idea in advance and rather akin to the approach for the Big Society – see Categories/Chairman »s Blog/Big Society in the right-hand column index on the opening blog page), cannot be considered democratic management or a suitable substitute for the management responsibility of representative government.
Creative Financing
novembre 9th, 2010Job Creation & Hope
novembre 2nd, 2010The Coalition government justifies its claim to fairness with respect to the effects of its overall cuts and tax rises (when also adding in the 50% upper tax rate of Labour) and it could also be said that progressively the top 2% of earners lose out most of all. Certainly there has to be a limit on how much the top earners are taxed before it becomes too much of a disincentive for both companies and individuals, effectively reducing overall tax take by perversely encouraging further tax avoidance schemes and relocation to more favourable tax regimes such as in Switzerland. Already the top 1% of earners in the UK contributes over 24% of total income tax paid, the top 5% over 43% and the top 10% over 53%.
The greater emphasis on cuts by the government (70%) compared with Labour (60%) has the opposition claiming a fairer approach to the public sector where the cuts will be felt in terms of job losses (although the planned increase in VAT will also hit private sector jobs if consumers reduce spending as a result). It is then all too easy for an opposition to say let us wait (until we are sure a fragile economy is really recovering), instead of facing up to the need for austerity to give the global financial markets confidence in UK government borrowing and its support for the critically important (to the economy) financial sector in the City of London. There is a corresponding human need to offer hope to those facing the prospect of unemployment by also growing the economy together with the accompanying job creation, noting that the wealth created by the private sector in a healthy economy is considered by economists as better able to support a public sector representing 40% or less of the total.
As a kick-start to growth David Cameron, in his speech last week to the Confederation of British Industry (CBI), has promised a £200 billion revitalisation of the road, rail, power and telecommunications networks in the UK. This also addressed the long standing complaints from the business community about the negative effects of such poor infrastructure on their operations. Since there is not much government money available for such grand projects, there is an associated plan to identify and overcome the obstacles to private investment to attract e.g. major sovereign wealth and infrastructure funds from the Middle East and Asia. Such funds, however, are wary of risk and the sale of the high-speed rail link between London and the Channel Tunnel provides a good example. Indeed the private sector consortium that started to build the link had finally to be rescued by British government funds in order to complete the project. Now the rail link is successfully up and running, pension and sovereign funds from around the world are bidding to buy it up.
Britain also needs to raise some £200 billion to spend on energy infrastructure just to meet its obligations under the Kyoto Climate Change Agreement and which would again create jobs. However, currently the initial £1 billion proposed by the government for the Green Investment Bank (to be established in 2013), to raise debt from the private sector by leveraging this taxpayer money when invested in green energy projects, is considered by experts as too small (in terms of mutual risk sharing when trying to attract private investment) and too late (by 2013) to make much of a difference. In addition, the Office for National Statistics (ONS) is concerned that such debt would have to be added to the National Debt. It has again been suggested that the renewable obligation tariff scheme for low-carbon technologies such as wind should alternatively be transformed into a low-carbon obligation instead. This would then provide for example the same support for private investment in nuclear power stations, where apparently there is still confusion in the industry over government policy. It seems though that the latest changes to the Carbon Reduction Commitment mean that the levies raised from big polluters will now go straight to the Treasury instead of funding bonuses to the better-performing companies, again not encouraging for the private sector.
The Prime Minister has also appointed Lord Young, the former Trade & Industry Secretary, to look into the problems facing smaller companies (Small & Medium Enterprises or SMEs) and e.g. how to make it easier for them to win government business or have more flexibility (compared with large companies) in not only hiring staff but also in reducing the number on the payroll when the level of business is down. Responding on BBC Radio to a question concerning the Efficiency Report on central government by Sir Philip Green (see Categories/Chairman?s Blog/Sir Philip Green/Efficiency Report in the right-hand index column), where Sir Philip is concerned that the government is not fully leveraging its purchasing muscle in offering its suppliers payment within 5 days when the commercial norm is 30 days or more, Lord Young considered government different from big business. This questions somewhat the overall purpose of the Efficiency Report. In this radio interview Lord Young did make the suggestion when asked about his ideas that e.g. for small businesses a single prequalification for a Local Authority could serve as a prequalification for all such entities across the country. In France there is a plan for the growth of employment in SMEs based on the American Small Business Act, in which regional government authorities would restructure their purchasing into separate types of business/industry lines, to allow SMEs to compete better with larger companies which have more resources. SMEs will also be supported when prospecting for export business in international markets.
Export markets provide opportunities for job creation in sectors where the UK has a competitive edge such as in financial services, advanced defence equipment, the creative industries, pharmaceuticals, design & engineering, fashion, comedy, the environment and the cream of its universities. Emerging markets offer the best prospects, accounting for one-third of the world economy but two-thirds of its growth. There is certainly room to grow business, the UK having exported in 2009 more to Ireland (£15.9 billion) than to China, India, South Africa, Russia and Brazil combined (£14.8 billion). One very visible and successful example of such a British company is Dyson with its efficient, modern and pleasing designs of top-of-the-range, bag-less vacuum cleaners, public hand-dryers and Air Multiplier fans. Dyson manufactures the products in Malaysia but is actively recruiting some 350 plus engineers for its design centre in the UK. In advanced semi-conductor technology there is also ARM an original start-up from the Cambridge University Science Park and still headquartered in Cambridge. ARM is now the leader in the design and licensing (but not the manufacturing) through a network of independent partners, of application processors for the fast growing market in mobile devices such as advanced smart phones and handheld/ pocket computers. It has 1700 employees, design centres also in France, India, Sweden and the US and makes its money from the licence for the original intellectual property, together with the royalties on every semi-conductor chip and wafer produced by its licensees.
Spending Review – Fairness & Hope
octobre 25th, 2010Nick Clegg, the deputy prime minister, should have done better than just airily dismissing as nonsense, the conclusion of the independent Institute for Fiscal Studies (IFS) which contradicts the claim of the Treasury that overall the tax and benefit measures in the October Spending Review are progressive.
The first IFS analysis in August which took account of a wide set of benefit reforms already announced by the Coalition Government, concluded that the impact of all tax and benefit measures yet to come would reduce the incomes of lower income households more than that of higher income households, except for the richest 2% (see also Categories/Chairman?s Blog/Fairness in the right hand index column). Therefore, these tax and benefit changes were considered regressive rather than progressive across most of the income distribution.
Now, when the new measures announced in the October Spending Review are added to the original IFS study, its original finding is said to be reinforced. Its analysis continues to show that, with the notable exception of the richest 2%, the tax and benefit components of the fiscal consolidation are, overall, being implemented in a regressive way. The IFS considers this as not necessarily unfair as the perception of fairness depends on the individual concerned and their personal circumstances e.g. the level of income, whether in work or on benefits etc. However, there are already a lot of people, some seemingly desperate and at the bottom end of the income scale, who are already protesting via comments to blogs on the Internet in an ugly and often semi-literate, class war-orientated and confrontational manner.
There is a need for the prime minister and his deputy with their otherwise considerable communications skills, to move this debate on from the no-win Regressive versus Progressive stage towards how they will promote future growth in the economy, together with the associated development of the hoped for work opportunities, particularly in the poorest, de-industrialised and jobless regions.
There will be some mismatches between the skills of such job seekers and those required for new jobs e.g. in the Green energy sector which is being provided with extra development funds. The key technologies for e.g. wind, solar and nuclear power do not even create manufacturing jobs in the UK but currently have to be imported from the European Continent. (Although Siemens are said to be going to approve this week a plan to build a British factory for a new generation of offshore wind turbines after receiving government assurances on £60 million for port development. The factory will employ 700 workers.) Any job creation from exports requires products and services with a competitive edge with major deficit countries such as the US and the UK wanting to export to counter weak demand from their own consumers, in common with e.g. Germany and Japan (both with home consumers unwilling to spend), all addressing the same fast growing emerging economies such as China. In addition, there will be competition from sometimes better educated and /or skilled job seekers from the more eastern parts of the European Union and outside. Ex-public sector workers are also not necessarily a natural fit to the private sector unless e.g. they are included as an integral part of the private outsourcing of former public services. There is a need for an overhaul of training schemes to help reduce long-term joblessness.
A key difference between the proposed Labour austerity programme of cuts versus tax rises in the ratio of 60/40 compared with the 70/30 of the Coalition, is that the latter considers the more you tax, the more this acts as a disincentive to new business start-ups, investment, growth and associated job creation in the private sector. There has to be a more positive vision than the mantra of Labour that cuts too soon and too deep will harm a fragile recovery. Indeed, whether the economy has recovered or fallen into recession again will not be officially apparent until sometime after the event, when the appropriate statistics for growth are made available.
Multiculturalism
octobre 20th, 2010An anti-immigrant wind is also blowing in Germany it seems and Chancellor Merkel has had to modify her position somewhat after e.g. angrily rejecting the claim of French President Sarkozy that she was also thinking of (as in France) a similar return to Romania of problematic, Roma traveller families from their shantytown-type settlements (a sensitive issue given the still relatively recent German past). It was only this summer that the multicultural German football team which comprehensively defeated England in the World Cup in South Africa, was celebrated in Germany as emblematic of a young country enriched by decades of immigration, the latter encouraged particularly from Turkey to meet critical labour shortages following the Second World War.
Now, however, Germany is debating the role of its 4 million Muslims and a recent opinion poll had 55% of Germans considering Muslim immigrants a burden costing the country much more socially and financially than they have contributed economically. Another poll published in Bild the largest circulation tabloid, showed 66% of the public believing that Islam does not belong in Germany. It has not helped that there are reports of German Islamic militants, the children of first generation immigrants, receiving training as terrorists in Pakistan and Afghanistan with several also recently reported killed by American CIA-operated drones. Mrs Merkel has now, therefore, been moved to tell her Christian Democratic Union (CDU) members at a party conference that Islam in some of its forms is not compatible with German law and that tolerance must stop at e.g. forced marriages and honour killings, which are not considered part of basic German culture. Of course Germany is not alone in being caught up in a wave of anti-immigrant feeling that is developing across Europe, with far-right and /or anti-immigrant political parties now also in e.g. Holland, Austria, Norway, Sweden, Denmark, France and the UK.
Even on the religious front, the Catholic Church is concerned at the diaspora of some 27 million Christians (including 6 million Catholics) spread across the Middle East and which is moving to the West, reflecting the difficulties encountered in their daily lives from the rise of political Islam, as the influence of Islamic fundamentalists increases. They are also under pressure in the Philippines, India and Pakistan. Above all, such Christians are put into a rather precarious situation of being considered as non-citizens when Muslim extremists mix religion and politics and do not accept their right to freedom of religion and conscience. The Vatican trusts, however, that working together with what it sees as still a vast majority of more moderate Muslims to combat such religious extremism, the Christian faith can continue to prosper in the Holy Land at least.
Considering the rather lax attitude taken to controlling immigration to the UK in the most recent past, taken together with the promotion of Islamic Turkey for membership of the European Union (EU), the view from France is that the UK needs to reflect more on what sort of society it wants for the future and to reaffirm its common cultural heritage with Europe. Certainly the Coalition government has already set stricter limits on immigration from outside the EU and which in the current economic slowdown, can more easily inflame emotions in areas where immigrants are competing for limited low-cost housing and jobs.
Pupil Premium
octobre 17th, 2010Ahead of the 20th October spending review and to protect politically sensitive parts of the total education budget, the government has responded to accusations of unfairness over their planned child benefit cuts by announcing a £7 billion Pupil Premium. This will be allocated over the same period as the spending review and aims to improve the educational prospects of the poorest children, supporting them up from the socially critical 2 years of age when they risk future exclusion and to the university stage. The total schools budget which normally represents some 50% of the total spend on education will also not be cut.
This pupil premium will target e.g. schools with the highest proportion of free school meals and, therefore, serving the most disadvantaged catchment areas. How the money is to be spent will be left to the discretion of individual school head teachers. Longer term savings in welfare spending are anticipated from enabling such disadvantaged children to catch up and maintain progress with their peers through extra tuition and other early support, thereby increasing their aspiration and hopefully reducing their otherwise over-reliance on state benefits in the future. Of course, with the total schools budget still limited by the restrictions on government spending, this could mean that schools in more affluent areas will get less.
Sir Philip Green Efficiency Review
octobre 13th, 2010The Coalition Government asked Sir Philip Green to examine and report back his findings and recommendations on how its central (Whitehall) departments spend money. His Efficiency Review has concluded in summary that the Government is failing to leverage both its credit rating and its purchasing and property (largest tenant/owner in the Country) scale to full advantage. This reflects inefficiency and waste, mainly due to very poor data (e.g. great difficulty in establishing actual transport costs) and process (e.g. lack of a centralised approach to purchasing, leading to significant price variations for common items across departments and multiple contracts with some major suppliers).
Implicitly acknowledging the political connotations of his report, Sir Philip has subsequently emphasised to the media that he was not looking for job cuts, just how the existing personnel in central government could work better with less. In addition, no total value has been placed on the actual amount of waste identified and/or the possible total saving, although practical examples sprinkle the report such as the 400,000 hotel nights spent in London for central government with a suggested 50% saving from video conferencing and other such solutions. He also questioned whether it made commercial sense to pay suppliers in 5 days (a relic from the last Labour government to help its suppliers through the recession), when the norm is 30 days or more in the private sector. Labour has already countered that government is complex and that more centralisation e.g. of government purchasing, will lead to more bureaucracy and expense and this also runs counter to the Big Society government idea of more decentralisation to local level to reduce cost.
Total central government spend in 2009/10 is put at £670 billion consisting of:
? Benefit & Grants???????????…………..270 (40.3%)
? Procurement (e.g. IT, Travel, Consulting)??166 (24.8%)
? Pay?????????????????……………..164 (24.5%)
? Property (including running costs)?????…..25 (3.7%)
? Other?????????????????…………….45 (6.7%)
Procurement at almost 25% of total spend in Whitehall is then identified as an area where the whole public sector would benefit from a centralised procurement process.
However, in asking the colourful Sir Philip to carry out this efficiency review the government has taken the risk that the media impact of his report will far outweigh the negative aspects of his personal tax affairs. That said, if it was his own business, Sir Philip would also have ensured that any such report by his own staff would not only have quantified the total waste and potential saving but also the required action plan and resources required to achieve an actual target amount.
Child Benefit Cuts
octobre 7th, 2010The government has announced at the Conservative party conference that, as part of their fiscal austerity programme to eliminate the public spending deficit, it is only fair to cut child benefit for those parents considered better-off and, therefore, able to carry a heavier share of the tax burden i.e. those with annual earnings of £44,000 or more and in a higher tax bracket.
However, due to the perverse and socially engineered effects of the current UK tax system, where everyone (whether married or not) is taxed as a separate individual, this would seem to imply that a single mother earning more than £44,000 would lose her child tax credits whilst a household where both parents each earn less than £44,000 for a joint income of up to £88,000, could still retain their child benefits. It has as a result been quite roundly attacked as manifestly unfair although an opinion poll taken immediately after found 85% of respondents in favour and 15% against, roughly in the same proportions as those who would still retain child benefits versus those who would lose out!
Given that the Conservative party in common with its opponents must employ clever political thinkers and analysts, this begs the question that, if it is so easy to pick such obvious holes in this child benefit tax policy, why announce it now during the Conservative party conference and in advance of the detailed programme of cuts planned to be announced on 20th October? One would like to think that this is part of an overall policy to guide public opinion towards the benefits of a tax system which not only provides tax concessions for children but also for the supporting married couples, taxed on their joint income as per the French system for example.
The Conservative party has traditionally supported marriage as a source of stability in society and the prime minister in defending these proposed child benefit cuts has already suggested that married status should be recognised within the tax system. There are of course the arguments of those who say that this discriminates against single, childless individuals and that there is no evidence that homes with two committed but unmarried partners cannot provide as stable a family environment as a married couple. In albeit mainly Catholic but constitutionally secular France, the tax system favouring marriage and children can also be traced back to the need to rebuild the nation after two world wars fought over its soil. Indeed with the almost statutory three children the resulting low level of direct income tax paid is highly attractive to young parents, during their early and generally lower income married life.
With civil partnerships including same sex couples now recognised under UK law, why cannot the tax system recognise marriage and the added costs of raising children during the early, more financially-stretched years? Certainly, Ed.Milliband the recently elected new-generation leader of the Labour party, who has in the past been too busy to have his name on the birth certificate of his first child, has admitted to the press that he is considering marriage to his partner in the future.
Swing Voters Poll
septembre 29th, 2010According to Lord Ashcroft, the Conservative party can gain from voting reform. It would be in the marginal seats that the Alternative Vote (AV) system would make a decisive difference, should the public vote yes for AV in the referendum planned for May, 2011.
Samples of 1500 people were interviewed in each of the following four groups of marginal constituencies:
1. The 50 most marginal and Labour-held with the Conservatives second.
2. The 50 most marginal and Conservative-held with Labour second.
3. The 25 most marginal and Liberal Democrat-held with the Conservatives second.
4. The 25 most marginal and Conservative-held with the Liberal Democrats second.
Under the current first-past-the-post voting system, Labour would now gain 28 of the seats where it was in second place to the Conservatives (group 2 above), due to a 4-point drop in the Liberal Democrat share exclusively benefiting Labour.
For the 25 Liberal Democrat-held seats (group 3 above), a dramatic 15-point fall in their vote compared with the general election hands all these seats to the Conservatives plus a further 5, the total of 30 new Conservatives then still two more than the 28 lost to Labour (in group 2 above).
Under AV the results are less dramatic. In Conservative-Labour marginal constituencies (group 2 above), while Labour voters were much more likely to give their second preferences to the Liberal Democrats, the latter were in turn more likely to give their second preferences to the Conservatives, although by a smaller margin. Overall Labour would gain 16 Conservative seats from group 2 under AV.
The effect of AV on group 3 above (the 25 Liberal Democrat-Conservative marginal seats) was that the Liberal Democrats were significant beneficiaries of second and third preferences. However, they were also so lacking in first preferences that the vote transfers only served to narrow the Conservative gains under first-past-the-post to 19 new seats under AV.
The overall result under AV would still leave the Conservatives (with 19) three seats up on Labour (with 16), compared with their two seat advantage (from 30) over Labour (with 28) under first-past-the-post.
This analysis of course takes no account of the effects of the proposed reduction in the number of constituencies (see article under Categories/Chairman »s Blog/Electoral Bias in the right hand column index), other possible changes in voter behaviour under AV (see the article under Categories/Chairman?s Blog/Alternative Vote in the right hand column index) and a surge in support for the Liberal Democrats compared with their current low standing in the opinion polls.
For full details of this Swing Voters Poll, go to www.lordashcroft and click on Latest News.
Fiscal Credibility
septembre 14th, 2010To restore its fiscal credibility within global financial markets, the Coalition has set itself the political goal of eliminating the current structural deficit (11% of GDP) in the UK by the end of this parliament (2015). Ed. Balls now shadow education secretary but with a major economic influence on Gordon Brown in the last government, has responded with what seems a rather self-serving attack on this planned deficit reduction programme, when linked to his ambitions as a candidate in the current Labour leadership contest and an associated need for public-sector union votes.
According to Mr Balls, there was no significant structural deficit until the collapse of tax revenues from the financial sector in 2008, although the Office for Budget Responsibility (charged with an independent watch over government fiscal policy) has this deficit already averaging 2.7% of GDP (£40 billion) from 2003 onwards. He had even warned the previous Labour chancellor Alistair Darling, that his planned £73 billion of fiscal tightening (of which £52 billion was in reduced planned public spending) to try and only halve the deficit over four years, was a mistake. Although seemingly ignoring the negative effects of the financial markets on the credit rating and associated elevated borrowing costs of the UK government, he is on the side of the more Keynesian economists who argue that the aggressive cuts planned by the Coalition will severely undermine the recovery. Indeed, he is advocating for the UK economy the example of the US which to date, despite its large deficit, has hardly tightened fiscal policy with almost US$1 trillion of financial stimulus and additional proposals from President Obama for e.g. US$50 billion of extra spending on infrastructure. The latter is viewed as key to supporting more rapid economic growth in the future. In the UK, the Confederation of British Industry (CBI) for the employers supports this case in warning against large cuts in spending on roads and rail.
The problem for the UK is that it is not as fortunate as the US which has in its favour the US$ as the major reserve currency in global financial markets, should the US choose to continue to try and spend its way to economic recovery. That is, unless the Chinese government, with its huge foreign currency reserves in US$, decides for geopolitical reasons to severely undermine the value of its US government bond holdings through a major sell-off. In the case of the UK, according to the Institute of Fiscal studies, a policy of ignoring the financial markets and rating agencies, together with continued borrowing instead of cutting public services and projects, would result in a deficit of 7% of GDP by 2015 and total public debt rising unsustainably towards 100% of GDP and beyond.
Within Europe in comparison, a country such as Germany with a deficit below 4% and a booming export sector has much more fiscal space should it so choose, to stimulate demand in its domestic market and at the same time drive overall growth within the Euro-zone and the EU. However, Germany with a memory of the effects of hyper-inflation not that far in its past, prefers savings and investment over the seemingly unrestricted consumer borrowing and spending of its more profligate neighbours, who should first put their own houses in order.