16 July 2012

That was week ending 13th July 2012

The elephant in the report

Last week the Office for Budget Responsibility’s (OBR) published its Fiscal Sustainability Report, its annual assessment of the UK’s overall financial health. The OBR reports that measures to cut the deficit together with others such as reforming public sector pensions have improved Britain’s long-term economic prospects. This will help maintain market confidence in the UK and keep government borrowing costs down.
So this year’s report is actually more encouraging than last year’s but only in the sense of comparing “we’re all doomed” to “we should all be very worried”. What the OBR thinks we should worry about next is the challenge of supporting the ageing population through healthcare and the state pension. They estimate that by 2061/2062 changing demographics will add £65bn to the budget deficit in today’s money, unwinding half the current round of austerity. This says the OBR will require further spending cuts and increases in taxation to stop public debt spiralling to nearly 90%.
Now 50 years is a long time. Perhaps advances in technology and productivity across the economy will offset some of the financial consequences of this demographic time bomb. However the OBR warned that unless productivity in the NHS picks up then government will have to make a further £68bn of cuts elsewhere.
The coalition promised to protect spending on the NHS. However at the same time the service is attempting to save £20bn by 2015 to ensure there are sufficient funds to cope with the rising demands of an ageing population. Hospitals have cut their headcount with the consequence that the number of shifts filled by temporary workers rose by more than half in a year. For a general nurse this comes at a price of up to £1,400 per shift compared to about £212 per shift for a nurse on the NHS payroll.
When you impose cost cutting on an unproductive organisation, it just gets more costly and unproductive. By contrast Toyota continuously improves productivity in order to achieve the means and opportunity to reduce costs. Of course sometimes you just have to cut costs, but unless your productivity improves the benefits are short lived and you have to cut again.
The stark but unspoken conclusion lurking in the OBR’s report is that, unless productivity in government and public services improve significantly we face decades of spending cuts and tax increases just to stand still. There is little sign that this government or any of our politicians actually understand what “improving productivity” actually means and why it is different to “cost cutting”.

The “do nothing” growth plan

The signs that anything is about to change are not encouraging. Last November the government announced a plan to boost the economy with investment in infrastructure with 500 potential projects worth about £250bn.  40 projects were identified as priority but 8 months on not a single project has been started. In the meantime it is reported that one in four public sector organisations will cancel construction projects over the next 4 months.
Last week we had the launch of the “funding for lending” scheme and announcements of major investments in rail including Midland Mainline electrification. We in the East Midlands have been pushing for this for what feels like most of our lives. However we also know that there is only one technical team left in the country with the expertise to handle this and that capacity is already fully committed.
Improving government productivity means not just announcing projects and schemes to boost economic growth but actually making them happen and delivering results. As I said the signs are not encouraging.

Surprise, surprise!

Bob Diamond told us he did not know that some of his Barclays Capital traders and been fixing the Libor rate. However last week we also learned that when Russia defaulted in 1998 BarCap traders were found to have breached the country limits imposed by the bank. This was never made public at the time but guess who the boss was at BarCap and did not know what had been going on? Yes, Bob Diamond no less. What was that Oscar Wilde line, something like “once is unfortunate, twice sounds like carelessness”!
We seem to be getting a steady flow of Chief Execs who don’t know what is going on in their businesses. The latest is Nick Buckles of G4S who only found out “8 or 9 days ago” that they were way short of the number of guards they needed to recruit for the Olympics. Now I have never run a FTSE business but if I had and the business had won a contract to supply security guarding for the Olympics I think the following equation would have occurred to me, “high profile + high risk = potential catastrophe”. You really wonder what these big company Chief Execs do all day!

So that was some of the week before this week. We hope you found some of the above thought provoking and useful for you and your business. We trust you had a good weekend and hope you have a great week this week.

1 comment:

  1. Steve - you are 100% spot on all the issues
    On the NHS issue - in addition to to what you said about temp worker coming in @ £1400 v 212 as full time nurse would. The whole of the NHS reform was "spec'ed out" by US consultants who stand to collect millions. This types of initiatives have a mutual beneficial relationship between politicians who want to be seen to be doing somethning and counsulatnts / private companies who have a vested interest in pushing these. Take the PFI as an example.
    On the Rail investment too. It was not many years ago that the productive capacities of rail manufacture was "cut/allowed" to fail by various govt.
    Bob Diamond & Nick Buckles - both illustrate we have got monkeys for "our" millions.