Monday, 7 June 2010

Why it's going to be painful

At long last Mr Cameron had lifted his head above the parapet and said what everyone knows - government expenditure will have to be reduced by far more than anyone had the guts to say during the election campaign. He said the finances are even worse than he expected, although I doubt if they are much worse because he had a team of generally competent people working for him who only needed to read the blogs of Mr Redwood and Mr Tyler to find a very close approximation to the true horror bequeathed by the most incompetent government in modern history.

Mr Cameron said, quite correctly, that cuts must be made to expenditure because what was inherited cannot be afforded and he said there will be pain. Part of the pain will be felt by those in non-jobs who will have to find something else to do, as I have explained before it is a cruel consequence of creating non-jobs that those who take them in good faith, give up their former careers and then lose their new career. For those who took employment as official State naggers (such as five-a-day consultants, smoking-cessation counsellors and carbon footprint managers) it will be no less than they deserve, but I am sure the hectoring bullies are relatively few in number compared to the administrative staff in their departments who will also have to go.

The reason the pain will be greater than necessary is that hiring useless baggages to suck-up taxes and produce nothing of any value has consequences far beyond their own salaries and pension contributions. They are part of a larger structure, whether it be in local or national government or in a quango. That structure comprises several tiers of employees whose salaries relate, at least in part, to the size of their department. As the department grows through the hiring of people to do nothing, the nominal responsibilities of each head of department increase, carrying with it an inevitable demand that he be paid more. In the tier above him pay must also rise both to maintain differentials and to reflect the supposed additional responsibilities borne by the higher level managers.

Say each head of department was on a salary of £60,000 which increased to £63,000. He or she might have been perfectly happy with £60,000 and undoubtedly they planned their personal financial commitments according to the salary they received. Now they have adjusted their plans to reflect the 5% increase. It might have been no pain to have remained at £60,000 throughout, whereas there is undoubted pain in taking a pay cut of £3,000 a year even when you are on a decent whack. But, of course, the heads of department will still be in place when the non-jobsworths have gone. Either they will have their salaries reduced - a difficult task when the civil service is as heavily Unionised as it is and an even more difficult task because they have the contractual right to receive the salaries that have already been agreed - or their salaries remain in place and the "wasted" additional £3,000 must be clawed back elsewhere.

Then there is office space. In some circumstances an expanded workforce can be housed in existing premises but very often a substantial increase in numbers requires an annex to be rented or bought or the wholesale removal of a department from one building to another. Acquiring and disposing of commercial premises costs money - agents' fees, surveyors' fees, legal fees. Some public bodies have the expertise in house to do some of this work without incurring any out of pocket expenses but most out-source the work so that any problem encountered later can be laid at the door of the external surveyor/solicitor's insurance policy. These fees represent a small annual outlay if spread over the expected lifetime of the new building but they are still additional costs which must be added to the additional costs associated with operating a larger building. On paring-back the workforce you could scale-down your office accommodation but that is also an expensive operation.

Let's take a simple example. Bogshire County Council hires climate change diversity five-a-day outreach empathisers (plus administrative support staff) to work in each department of the council. Their salaries come to £1million a year, acquiring additional office accommodation incurs fees of £40,000, fit-out costs of £100,000 and the extra annual cost of that office accommodation is £50,000. Bogshire can sack the lot and (subject to one-off redundancy payments) save £1million a year. It can't get back the £140,000 it spent on fees and refurbishment and it can't save anything substantial on annual office costs without either selling in a falling market or surrendering the lease on the best terms it can negotiate and then re-acquiring smaller accommodation with all the one-off costs that entails. In order to return to the position it was in before expanding its expenditure beyond affordable levels it would have to eat into the things it was doing before. Assuming there were no non-jobs, useful people doing useful things will have to go or take salary reductions simply to undo the damage caused by hiring useless wasters to do nothing.

Countless further examples can be given of the long-term cost of correcting a structural over-spend. It is a far more expensive exercise than merely getting rid of unnecessary employees.

1 comment:

Stan said...

The fact that there are deep and painful spending cuts on the way shouldn't be a surprise to anyone - but what annoys me is central governments approach to it; i.e. their tendency to micromanage the cuts down to the smallest detail.

What they should do is ringfence key services - e.g. weekly bin collection, care for the elderly and sick, etc. etc. - and then just tell the various quangos and departments that they must cut their budgets by x% (I'd recommend 20% this year with a further 5% reduction year on year for 10 years). How those departments manage those cuts - while providing the key, essential services - is up to them, but they must do it. What we don't want is the Treasury spending days and weeks trying to trim £60 million quid here and £150 million there - just tell all those departments how much to cut and what they have to retain and leave them to get on with it. Isn't that why we have these different levels of government for anyway?