UK FISCAL SUSTAINABILITY -- The next 50 years?

50 years of frugality?

The Office of Budget Responsibility (OBR) has published its first report on fiscal sustainability which is proving to be very interesting reading indeed.

The Office for Budget Responsibility (OBR) was created in 2010 by the coalition government to provide independent an authoritative analysis of the UK’s public finances. As part of this role, the Budget Responsibility and National Audit Act 2011 requires the OBR to produce “an analysis of the sustainability of the public finances” once a year. This Fiscal sustainability report is its first such analysis. Its approach is to try and examine the future and look into the period 2015-15 to -2060-61.

How many of us will be around then?

The report predicts that age related spending will exceed 27% of GDP by 2060 and PSND could rise to over 100% of GDP unless corrective action on public expenditure is not taken 

The government would need to implement a permanent tax increase or spending cut of 1.5 per cent of GDP (£22 billion in today’s terms) in 2016-17 to get debt back to 40 per cent of GDP and a cut of 0.8 per cent of GDP (£12 billion in today’s terms) to get debt back to 70 per cent of GDP.

It must be remembered that these are forecasts and with them they carry significant risks. If the structural primary balance in 2015-16 was worse by 1 per cent of GDP than in the OBR forecast, then Public sector net debt (PSND) would increase to around 150 per cent of GDP in 2060\61. Similarly if NHS spending will grow by 1% over GDP growth in the future then PSND could increase to above 200% of GDP in 2060\61. 

This attempt to examine the growth of PSDN and the primary balance is extremely useful, but it emphasises the fragility of future public sector revenues and expenditures in the light of huge pressures like the ageing population, migration, inflation and pension liabilities, all areas which will need to be addressed by public sector financial planners in the medium to long term. For a full version of this report please view:

http://budgetresponsibility.independent.gov.uk/wordpress/docs/FSR2011.pdf

A COUNTRY IS NOT A COMPANY -Exploring the thoughts of Paul Krugman

Can he run the economy as well?

Next time you hear that a successful businessman has been promoted to the cabinet. Please consider why that person was chosen, do brilliant businessmen always make great economic advisors for whole countries? Paul Krugman argues that they do not always see the big picture. They are used to situations where they can act very quickly and have a direct command and control of the resources within their enterprises that can make a timely impact. Often they do not need to persuade diverse groupings of the need to take take a particular course of action -- they can act speedily and unilaterally,often without a particular focus on some of the social consequences of their actions. When they enter government, this modus operandi changes and life for them can become more difficult and frustrating. They need to negotiate a much more complex environment and try to cajole and persuade people to do things -- not just command them and sit back waiting for everything to happen.

Krugman argues that businessmen support free trade and also exporting industries because de-facto they believe that they lead to increased employment prospects. However one country's exports are another country's imports. The importing country will shift purchasing away from its own domestically produced goods to imports. Then the domestically produced good industry will suffer at the hands of greater imports. Will the export boom in one country have an adverse effect on employment in the importing country? The answer is probably -- Will there be an increase in jobs globally? Probably there will be a neutral effect on job creation.

Similarly, when multinationals directly invest in a country, the common belief is that the country which has received the investment will have a trade surplus,on the contrary, this is not the case -- an increase in inward investment will lead to a trade deficit on the balance of payments. This is because inward investment will appreciate the currency of the investee country which will lead to weaker export performance and greater imports. If there is a deficit on a country's trade account there will be a surplus in its capital account and vice- versa. The balance of payments as a whole is always zero when a country's capital account is included in the analysis.

Business executives operate intuitively and look for specific opportunities to make a profit, when they write books about their life stories and how they made it, then their books are interesting, but when they try to enunciate a general theory of their own success they are less well received by the populace. A country is vastly more complicated to run than even the biggest company, the economy needs to be run on sound economic principles within a framework -- detailed policy intervention is often unnecessary and even undesirable. In many ways a company is more of an open system than an economy. It may double its sales for example - however taking a wider perspective, within a country if a company doubles its sales other companies have probably had their sales considerably reduced. Something that can work successfully for an individual company, might not work for the economy as a whole. An individual company increasing its savings may not be significant for the economy but if all companies act in this way the results on aggregate demand in the economy might be disastrous. The difference boils down to this -- Businesses are relatively open systems that can act with autonomy and can increase their activities without having much direct impact on themselves, whilst countries are still regarded as closed systems where most change is in essence a zero sum game.

So when you next hear a businessman expounding on the economy make sure he\she knows what they are talking about -- a company or a corner shop are not the same as an economy. Perhaps it would be better to focus on the life story of the businessman where valuable lessons on intuitiveness, creativity,hard work and responsibility can be learned -- Perhaps that is why so many biographies of businessmen and women are sold. Leave the finer points of the dismal science to the dismal scientists.

AUDIT COMMISSION AND NEWS OF THE WORLD -- Will we miss them?

Just reflecting on the abolition of the Commission and will it be missed -- I think on balance yes but only in some areas. The Commission's work on value for money and other management\financial studies on efficiency\good governance and other practices was very useful indeed in helping authorities manage their resources much more efficiently and effectively. It is a shame that this independent guide\assistance function will now go and it seems we will need to rely on the big accoutning firms to help us in this context. Lets not kid ourselves, the big 4 firms are rubbing their hands in glee at the opportunities this will present to them. Prices for audits will rise and the more remote authorities will not benfit from cross subsidisation as they did previously and will pay even higher audit fees. The circa 50 million pounds savings claimed from abolishing the Commission have never been adequately quantified in my view and I wonder if they have been floated to justify an essentially political decision. Some downsides to the Commision's activiites included the far too bureaucratic CPA regime where points and later flags were given for all sorts of performance based issues, often this did not chime with people's experiences of authorities on the ground,when they dealt with them, which was a shame but called into question the validity and relevance of the whole CPA regime. The Commission did itself no favours on that one,similarly in my experience of them as external auditors they have been extremely pernickety and picky forcing me to do certain calcualtions\presentations which although pure in the accounting sense, did not help the punter on the street very much,better understand his authority's accounts. There is talk of a mutual organisation emerging from the ashes that will compete against the big 4 -- But how is it going to be funded? There has also been some talk of its major competitors probably,individually,wanting to stangle it at birth so that a form of audit oligopoly can be maintained,lets hope the rump of the Commission can successfully set up something that will provide more competiton to the people who are so keen to step into its shoes.



Will we really miss it?



As for the NOTW, did we really expect anything else from this scandal sheet? It claims to have broken a number of very important public interest stories, but I do not recall that many of them. Illegal phone hacking,denial, links with politicians of all parties,illegal payments to police officers have given it exaggerated power. It did have 2.7m readers, presumably those interested in its scandal ridden pages. It is strange how in Western societies we really do go in for this type of nonensense in the press and pretend it is something else. There was so much fear of NOTW and the whole News International (NI) brand that politicians of all persuasions felt they had to indulge NI staff to ensure their own political positions. Tony Blair, Gordon Brown and David Cameron all courted NI, this was clealry a mistake of huge proportions by all concerned. They felt they has to invite NI executives to their personal events like weddings, children's parties and even funerals. This was over the top for me.

Will I miss the NOTW ?-- Not really - However watch out for The Sun on Sunday -- TheURL has already been reserved. As for the Audit Commission, well perhaps a few tears will be shed, but not for some of their purist audit approaches. I'm not sure that a new version of the Commission will emerge,which is a pity.