Tag Archives: Cost Centre

FCNK – Fur Coat, No Knickers

British politics are cyclical and there are two views as to the nature of the cycle. One is that Labour is in power for a bit and then the Conservatives come along with lots of shovels and clear up the mess. The other view is that it is Labour politicians who wield the shovels after the Conservatives’ turn.

There is another other great political constant , not-only in British politics but worldwide.  Ultimately, all party leaders fail – as do their parties. Then the other lot make an attempt. Then the shovels come out etc. etc.

This is an unbreakable cycle. The cycle can only be broken by  totalitarianism . However,  totalitarian States always have a “sell-by” date because the chaos of the democratic party-based cycle is always waiting in the wings to deliver its own flavour of damage. Totalitarianism often degenerates into tyranny, followed by the chaos of either imposed or self-imposed democracy. Just look at Iraq.

The root cause of chaos in democracy is always created by  the impact of political ideology on economics.  The latest change in the United Kingdom government is an excellent example.

There is no doubt that the British economy is in chaos and that the Conservatives believe that their policies are the only way to hose away the Labour mess.

Chancellor George Osborne is standing where he started two years ago. In the economic foothills of a great 5-year economic and political climb. Unfortunately, the peak towards which he is guiding us will not remain still and two years after the journey began, the ultimate goal has moved.

If he is a good Chancellor, he will not be afraid to change direction as we travel. Let us hope that he does not repeat Labour’s mistake and refuse to shed the shackles of ideology when the going gets tough. To put it in political terms, there will be times when he will need to think as a Socialist and other times when he will need to be even more right-wing than currently seems healthy.

That is why it is good for him to have a few Liberals in tow – although, ideally a few left wing Labourites may have been preferable.

Adam Smith is his Wealth of Nations (1776) referred to the United Kingdom as  “a nation that is governed by shopkeepers“.  Subsequently,  Napoleon said  “‘Angleterre est une nation de boutiquiers.” In typical French fashion, neither original nor accurate but we understand what he meant. He thought that he was being disparaging whereas Adam Smith’s original quotation was more about the Britain expanding its Empire for the sole purpose of establishing new markets of customers for its own economy. Like shopkeepers would.

Had Napoleon foreseen what the British economy was to become in the 21st century, he may have said, “Angleterre est une nation d’administrateurs, fonctionnaires et conseillers en gestion”

England is a country of administrators, Civil Servants and Consultants.”

If there is one good reason for the present change in government, then that is it.

There are jobs which create wealth and there are jobs which are the so-called “Cost Centres” – the jobs which only spend. Administrators, both public and private who don’t actually contribute to production are a drain on an economy.  Any organisation which is heavy on administration compromises its ability to generate a surplus – the same applies to a State.

Under New Labour, organisations such as the NHS  experienced an massive influx of administrators and  there has been a mushrooming of  Quangos. More and more inquiries have cost the economy millions, as have the gradually expanding mini-Westminsters that are our Local Authorities. Empire-building has become  the Public Sector’s favourite contact sport.

Obviously being politicians, the Conservatives  are not able to say that there are too many non-productive civil servants but that is exactly what they do mean when they point out that the so-called Public Sector needs some rationalisation –  but the gradual expansion of the administrative classes is nothing new.

My first job many years ago was in the Scientific Civil Service. Our establishment had just over 200 of us researching and more than 400 administrators. We were in prefabricated temporary structures whereas the pen-pushers  had a modern office block.  The argument was that as we were spending taxpayers’ money, no cost was too great in order to ensure that every single penny spent was controlled and accounted-for. Plus ça change.

Until very recently, there has been a “no expense spared” attitude among both public servants and politicians with little or no incentive for either of them to control expenditure. A case of   rampant accelerating Cost Centre growth.

That is why the Chancellor announced a freeze on Public Sector pay and launched a probe into public service pensions and why the budgets of government departments will be cut by 25%. In addition, the Civil List has been frozen at £7.9 million p.a. and the Government will dispose of some of its assets in order to raise cash – notably, the air traffic organisation NATS, the Tote and the student loan book.

However, in spite of  the banking system remaining one of the government’s major creditors, it has been “clobbered” with an annual levy which will probably only collect about £2 billion per year. Compare that with the total cost (so far) of rescuing our banking system, which is well-in-excess of £850 billion.

Unfortunately, the government is also committed to hand-outs to a long queue of advisers and consultants. Notably,  Slaughter & May, the international law firm will be paid nearly £33 million for commercial legal advice and Pricewaterhouse Coopers over £11 million for its work on asset protection.

The government is also paying Credit Suisse at least £500,00 per month for advice on the asset protection scheme with a similar amount being paid to Deutsche Bank.

Needless to say, there are other government “advisers” on the payroll so the final total cost of the government’s bank rescue activities is far from established because it is open-ended.

In spite of the crippling government (and therefore taxpayer) expenditure on the banks, they are still declaring weirdly high profits, paying themselves bonuses and not delivering the commercial lending agreed with the previous Chancellor.

The government has not been able to fund all this purely from the income that it generates from taxation so it has had to borrow more and more. Hence the huge deficit and the international pressure to do something about it.

That explains  the increase in VAT, the quite major changes to the benefits system, the various “tweaks” to personal taxation, the sell-offs and cuts in public expenditure.

That has all had to be counterbalanced by an encouragement for business to produce more, hire more people and thereby generate not-only more tax for the government but also stimulate us all to spend more in order to maintain the  “produce-sell-buy-spend” cycle.

The Chancellor has taken a bit of a risk because he is assuming that the “produce” stage of the cycle will ultimately act like a defibrillator applied to a dying patient’s heart. He believes that ultimately it is business which makes an economy function. On the other hand, the Socialists believe that the cycle begins with “spend”. Hence their concept of , for instance spending on roads, railways and other government-driven projects in the hope that “spend” creates employment plus income for the individual, which in turn stimulates demand which drives production.  Same principle but a   fundamentally different starting point.

It has been shown many times that Cost Centres (mostly support functions) do not generate direct profit. The drivers of any economy are Profit Centres – the ones that make something and then sell it at a profit.

The current debt-ridden economic climate needs the harsh but correct approach favoured by the Chancellor.  For the moment, the Profit Centres have it. Although that does NOT mean that the “Austerity Method” cannot be tempered with a bit of good old-fashioned government spending when necessary.

Ideology must never be a bar to sound economic common sense.

Finally, the government has the one major Cost Centre and that is the Benefits System. The system has been abused  – of that there is no doubt.  As part of its strategy, the last Labour government needed to massage its unemployment statistics. Encouraging more and more individuals to avoid the dole queue by remaining in education is an example of a  transparently obvious ploy. The other was an over-generous benefits system especially the blatantly abused Disablities Allowance which cost the taxpayer over £11 billion per year.

The Disabilities Allowance was introduced 20 years ago by a Conservative government when under 1 million people were eligible. In the intervening years, the number of claimants has grown to approximately 3 million which represents a substantial percentage of the working population.

The Chancellor’s approach of proper medical testing for Disabilities Allowance claimants may sound Draconian  but absolutely necessary because in spite of the fact that unemployment statistics will doubtless be adversely affected, there will be a corresponding increase in those eligible for work. Once again,  an example of Cost Centres being converted into potential Profit Centres.

What of normal productive workers, entrepreneurs and those engaged in support functions which are designed to keep the economy going? Have we escaped intact?

The answer is that we are all subject to collateral damage, either through increased living costs or unemployment. The real unemployment figure has been approaching 3 million for a few years and it is only now that Gordon Brown’s Canute-like posturings have been consigned to the poubelle of history , that an accurate picture has emerged.

The picture is this:

None of us is as well-off as we imagined during the New Labour years of illusory plenty. Many have been screwing the system for too long. It started with the politicians and it is now our turn to realise that the days of  “Fur Coat , No Knickers” are well and truly over.