Labels: Criminal Justice, cuts POSTED BY WAT TYLER AT 8:54 AM COMMENTS (15) Labels: debt POSTED BY WAT TYLER AT 5:56 PM COMMENTS (11) 
WEDNESDAY, JUNE 30, 2010
Babies And Bathwater
The BBC and the Grun aside, everyone agrees that spending must be cut. Now the question is what spending?
And therein lies a considerable risk. The risk is that because we're all in this together, the cuts will be shared out across spending departments pro rata, pretty well irrespective of merit and irrespective of the consequences.
Today's announcement by Ken Clarke that prison no longer works - and by implication prison spending can be cut - is a dismal case in point.
As regular readers will know, we have long been fans of locking up more criminals. As we pointed out in our very first blog on the Cost of Crime, the Home Office has estimated that 100,000 persistent criminals are responsible for half of all our crime. But of that 100,000, only 80,000 are inside at any one time - the rest are out and about creating mayhem. With 80,000 more prison places (ie doubling the existing number of places), we could keep them all inside permanently and halve our crime rate. And the £3-4bn pa costs of the places would be far less than the £80bn odd estimated cost of crime.
According to Ken, prison doesn't work because it can't cure criminals either of their drug habits or their tendency to commit further crime after release. And he certainly has a point. Nothing we've ever seen says anyone knows how to do that with any degree of confidence.
But the idea that community sentences would be a good alternative is pure wishful thinking. In reality, our £1bn pa Probation Services is staffed by Mr Barrowclough's soppy brothers - they're barely capable of tying their own shoelaces let alone supervising a bunch of villains picking up litter (eg this blog). And frankly, we don't believe anyone could do the job successfully.
Our plan is simple - three strikes and you're out (see this blog). If you've already been sentenced to jail twice, on the third offence you're out permanently. Why? Because the stats show that once someone has been sentenced for crime three times, he's more than 50% likely to reoffend:
So prison is most definitely not something we would cut. The first duty of the state - the thing we really do pay our taxes for - is to protect the honest law-abiding citizen. It is unacceptable that cuts should fall there, while aid for space-race India remains untouched.
Which is not to say we couldn't improve the cost efficiency of the prison service. We agree with Ken that £38 grand pa seems like a lot to pay for a year inside. Andwhen you look at the costs of individual prisons you find a huge range. The most expensive cost three times as much per prisoner as the cheapest, and while differing security levels undoubtedly account for some of that, it does suggest some prisons are much more efficient than others.
Actually, I've just been listening to Ken on R4 Today, and the words "back" and"peddling" spring to mind. So we'll see.
As we all understand, these spending cuts are going to be very difficult. But we do expect the government to exercise proper judgement. Sharing the pain is all very well, but we taxpayers have some clear priorities, and we need to see them reflected in the budget allocations. We do not want to find the bath empty of both bathwater and baby.
TUESDAY, JUNE 29, 2010
What Exactly Is The National Debt?
Question - what exactly is the National Debt?
It sounds like a straightforward question and Tyler's Oxford English Dictionary gives a nice straightforward answer - "money owed by State because of loans made to it".
Good. Very clear.
But just out of interest, how does the OED define a loan to the State? "Money contribution from individuals or public bodies to State expenses that is acknowledged as debt".
Hmmm.
So the National Debt comprises contributions to State expenses that are acknowleged as debt. Just as an aardvark comprises an animal acknowledged as an aardvark.
See, when it comes to debt, governments have got this chronic tendency to avoid acknowledging anything as debt if they can possibly acknowledge it as something else instead. Like an aardvark, say.
As regular BOM readers will know, we've blogged the real national debt many times - ie the official government debt plus various aardvark/Enron items like PFI, unfunded public sector pensions, Network Rail, and nuclear decommissioning. These are all items that place on taxpayers a clear contractural commitment to make payments at some future date.
Most recently we estimated this real national debt totalled around £2.25 trillion, over 160% of GDP, and getting on for £100 grand for every household in the land.
That's scary enough, but the bad news is that our real debt is even higher.
That's because of our nationalised banks (highlighted by TomTom in comments on yesterday's post). In case you'd somehow forgotten, we taxpayers own 84% of RBS and 41% of Lloyds. And because that means we are now in a position directly to control what they do (hah), both are now officially categorised as being in the public sector. They have been nationalised, and their liabilities are now ours.
When last sighted (end-2009), those liabilities totalled £2.6 trillion (Lloyds on £1trn and RBS on £1.6trn). That's a stomach lurching 180% of GDP.
Can we really be on the hook for all of that?
Well, there are no formal blanket guarantees, so if the balloon went up, in theory, HMG could still walk away. But in reality, walking away from the liabilities of a bank that was 84% state-owned would nuke HMG's credit standing for decades to come. Ex-Armageddon, walking away is inconceivable. Whatever the small print may say, in reality, we are on the hook.
The only comfort is that these £2.6 trillion of liabilities are backed by £2.6 trillion of assets (actually slightly more, once you take account of the banks' equity capital). So with a very favourable wind, we might not end up losing anything at all.
But the liabilities still have to go on HMG's balance sheet, because these banks are now our responsibility.
And in fairness to the Office for National Statistics they are attempting to do precisely that. In fact, they have been working on it for the last 18 months (see articles here). They long ago included the liabilities of Northern Rock and Bradford and Bingley in the official published figures for government debt (although they continue to publish an alternative debt series excluding them). And they hope soon to include the two big ones.
Why the hold-up? It's because the two banks in question are not keen on having their balance-sheet details paraded around in public, and are arguing commercial confidentiality (to which you might say they should have thought of that before they went bust and came crawling to us for a bail-out).
Anyway, the ONS say they expect the banks' inclusion will increase our official national debt, but "only" by up to £1.5 trillion. That's less than the £2.6 trillion total for the banks' gross liabilities because national debt accounting conventions allow governments to net off holdings of liquid assets, of which Lloyds and RBS have quite a few. Why are governments allowed to net off liquid assets when the banks aren't allowed to do so themselves? Search me - those are just the rules (as devised by government officials).
But on top of these bank liabilities there are some other chunky items we ought to consider.
Like what about state pensions? They're a specific state liability in the sense that most of us have contributed to them through National Insurance - or to put it another way, we've lent money to the government through our working lives against a promise of a state pension in old age. And the coalition's new "triple lock" uprating guarantee makes that promise even more water-tight. So depending on the exact assumptions used, that's another £3-7 trillion of debt to add on.
And what about all those big IT contracts we hear so much about (eg the NHS supercomputer)? Many of them commit us to payments far into the future.
Or what about those big defence procurement contracts (such as tranche 3b of the Eurofighter)? They too contain commitments to substantial future payments.
Or what about all the various financial guaranteees (explicit and implicit) we've given to the UK banks which have not been nationalised? Yes, they're only contingent liabilities, but surely our National Debt stats should not ignore them altogether.
The fact is there is a spectrum of liabilities ranging from sure and certain financial debt such as gilts, through specific contracts for future goods and services such as the supercomputer, to contingent liabilities such as bank guarantees. And what we need more than anything is more information on how that spectrum is made up.
The good news is that post-Gordo it does seem that the ONS are moving towards greater disclosure. They have distinguished the following broad types of debt:
They also say:"ONS has a key role to play in presenting the data necessary for assessment of fiscal burden and risk, and as such needs to understand user requirements beyond the National Accounts boundary. The liabilities in this category which will attract the most attention are; future expenditure under PFI, unfunded pension schemes and government guarantees.
So to sum up, here's our updated table of the real national debt including the nationalised banks, but excluding contingent liabilities, all commercial contracts except PFI, and implicit liabilities such as state pensions. In other words, it is a conservative estimate:
While estimates of these liabilities are disclosed as memorandum items or notes in departmental resource accounts, they are not systematically presented in aggregate (whole of government) form.
ONS should consider its role in presenting a wider range of data on government and public sector liabilities, as is the case in other countries."
So that's just £200 grand per household.
We'd better pray those assets sitting in the vaults of Lloyds and RBS are worth something close to what they claim.MONDAY, JUNE 28, 2010
Doomsday II - Growth Vs Debt
Fed up with the Major's rant about overpaid nancy boys betraying the nation, Tyler sought relief in the doomsday machine. Post-George, is it still ticking?
As regular readers will know, the doomsday machine is set in motion when a government's debt interest bill gets so big that the government has to borrow increasing amounts just to pay it.
It's like having a credit card, where instead of paying off the interest each month, you borrow more to cover it. Then, even if you stop using the card to make further new purchases (ie no more new England shirts) the debt still gets bigger and bigger and bigger, right up to the moment when doomsday dawns (ie when the credit card company calls to repossess your children). That's the doomsday machine.
Now, for governments, the key debt total is less the absolute size of the debt incash terms, and more its size in relation to GDP. That's because governments have the power to raise money from tax, and GDP is a broad measure of taxable capacity. So as long as debt isn't increasing in terms of that overall taxable capacity - the argument goes - everything is broadly under control (eg see this blog).
So for governments, what matters is whether GDP is growing faster than the rate at which debt interest is adding to their existing debt.
On that basis, how are things looking for HMG?
Over Labour's last 3 years things have been pretty grim. According to the Office for Budget Responsibility (OBR), over the period 2007-08 to 2010-11, GDP growth averaged just 1.3% pa (in money terms - ie including both real growth and inflation). Against that, the average interest rate on our debt averaged 4.0%.
Which means that interest costs were increasing our debt by 2.7% pa faster than GDP growth - the government's debt was being increased faster than the taxable capacity of the economy, and the doomsday machine was up and running*.
Fortunately, the OBR now expects a big turnaround. Over the next 5 years it projects GDP growth will accelerate to 5.2% pa (in money terms), whereas the average interest rate on HMG's debt will only increase marginally to 4.1%. That 1.1% gap means that debt interest will no longer be driving up HMG's overall debt relative to GDP.
In a nick of time, the doomsday machine has been stopped.
Phew.
Well, phew except for one thing - these are no more than forecasts.
For one thing, they depend on real GDP growth returning to a pretty healthy 2.7% average rate. Sure, that's not as wildly optimistic as Darling's last bonkers forecast, but it's still pretty demanding in the face of a stuttering European recovery.
They also depend on the government's debt interest rate (gilt yields) staying well behaved, increasing only modestly from current levels. That could well happen, but only so long as markets remain unconcerned about inflation - one good sniff of inflationary finance and yields would shoot up.
And history is not altogether encouraging. Over the long haul (back to 1800), gilt yields tend to more or less track the growth rate of nominal GDP. But you don't have to go back very far to find periods where yields have remained above GDP growth for years (as was the case for most of the 80s and 90s).
All of which underlines the need for fiscal caution. George does seem to have stopped the doomsday machine, but one false move and the mechanism could soon trip back into action.
*Footnote. The relationship between GDP growth, gilt yields, and the government debt ratio is discussed further in the OBR's first pre-budget report here. The Economist also has a couple of good articles on sovereign debt, and they have also updated their indebtedness league table, showing us in the second worst position after Spain (but note it's a 2010 snapshot and does not take account of George's budget):
Thursday, 1 July 2010
It's rather important to recognise the difference
The official definition is easy... and misleading
George may have defused it
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